Introduction to FASB Lease Accounting Standard
The Financial Accounting Standards Board (FASB) issued a new lease accounting standard, ASC 842, which replaces the previous lease accounting standard, ASC 840. The new standard requires lessees to recognize lease assets and liabilities on the balance sheet for all leases with terms of more than 12 months.
The FASB standard aims to increase transparency and comparability in financial reporting by providing a comprehensive framework for lease accounting. The standard applies to all entities that enter into leases, including lessees and lessors, and is effective for public companies for fiscal years beginning after December 15, 2018.
Lease Classification Under FASB Standard
The FASB standard introduces a new lease classification system, which categorizes leases as either finance leases or operating leases. Finance leases are those that transfer substantially all the benefits and risks of ownership to the lessee, while operating leases are those that do not.
The classification of a lease as a finance lease or an operating lease has significant implications for financial reporting, as finance leases require the lessee to recognize the lease asset and liability on the balance sheet, while operating leases do not.
Lease Recognition and Measurement Under FASB Standard
The FASB standard requires lessees to recognize lease assets and liabilities on the balance sheet at the commencement date of the lease. The lease asset is measured at the present value of the lease payments, while the lease liability is measured at the present value of the lease payments, adjusted for any lease incentives or penalties.
The standard also requires lessees to remeasure the lease asset and liability at the end of each reporting period, taking into account any changes in the lease terms or conditions.
Lease Disclosure Requirements Under FASB Standard
The FASB standard requires lessees to disclose certain information about their leases, including the nature of the lease, the lease term, and the lease payments. Lessees must also disclose any lease incentives or penalties, as well as any sublease income or expenses.
The standard also requires lessees to provide a maturity analysis of their lease liabilities, which shows the amount of lease payments due in each of the next five years and thereafter.
Implementation and Transition to FASB Lease Accounting Standard
The FASB standard provides a transition approach for lessees to adopt the new standard, which allows them to either apply the standard retrospectively to all leases or use a modified retrospective approach. Lessees must also disclose the impact of the new standard on their financial statements and provide any necessary adjustments to their financial reporting.
The implementation of the FASB standard requires significant changes to a company's accounting policies, procedures, and systems, and may also require significant investments in technology and training.
Frequently Asked Questions
What is the effective date of the FASB lease accounting standard?
The FASB standard is effective for public companies for fiscal years beginning after December 15, 2018, and for nonpublic companies for fiscal years beginning after December 15, 2019.
How do I determine if a lease is a finance lease or an operating lease?
To determine if a lease is a finance lease or an operating lease, you need to evaluate whether the lease transfers substantially all the benefits and risks of ownership to the lessee.
What is the difference between a lease asset and a lease liability?
A lease asset represents the lessee's right to use the underlying asset, while a lease liability represents the lessee's obligation to make lease payments.
Do I need to recognize lease assets and liabilities on the balance sheet for all leases?
No, you only need to recognize lease assets and liabilities on the balance sheet for leases with terms of more than 12 months.
How do I measure the lease asset and liability at the commencement date of the lease?
The lease asset is measured at the present value of the lease payments, while the lease liability is measured at the present value of the lease payments, adjusted for any lease incentives or penalties.
What disclosures are required under the FASB lease accounting standard?
The standard requires lessees to disclose certain information about their leases, including the nature of the lease, the lease term, and the lease payments, as well as any lease incentives or penalties.