You’ve been hearing a lot about it over the past couple of years, but its here to stay. That’s right, we’re talking about the new lease accounting changes.
Nearly a decade ago, the Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB) came together to establish a new set of accounting standards that would provide greater transparency and comparability in financial reporting. It has taken awhile, but the new lease accounting standards have been released.
We are here to help you by answering a couple of the most frequently asked questions on FASB lease accounting.
What is FASB?
The Financial Accounting Standards Board and the International Accounting Standards Board worked together on converging the leasing standard. There are some key differences between the versions, however both share the common goal of putting operating leases on the balance sheet.. As of February 25 2016, the FASB issued an Accounting Standards Update (ASU) intended to improve reporting financials around leasing transactions. The FASB guidance, ASU Topic 842, does allow two sets of accommodations as a means of sufficing the needs of users and preparers. Two packages of practical expedients have been established which are applicable only to the comparative transition period for both the lessee and lessor. Read our blog “FASB Topic 842 Practical Expedients” to know more about Lease Accounting Practical Expedients.
The main area that was going to be affected? Lease assets.
What leases are impacted by these changes?
All leases are impacted by the new standards, not just real estate leases. Think equipment and vehicle leases. The only exceptions to this are short term leases (those with a term of 12 months or less) or leases of intangible assets, leases to explore for or use natural resources, leases of biological assets, and service concession arrangements (see IFRIC 12).
The accounting for leases GAAP has embraced a dual approach to lease classification for lessees with two lease types: Operating Leases and Finance Leases. The IASB has a single approach to lease classification for lessees with a single lease type: Finance Leases.
Why should you care?
About 85% of leases aren’t currently reported on balance sheets globally. This makes it extremely difficult for investor’s to accurately analyze companies’ leasing activities and their lessee liabilities. The new accounting standards will greatly affect companies where the leases have been kept off of the balance sheet previously. The main companies and organizations that will be affected are those that lease commercial property, large equipment, or assets such as airplanes and manufacturing equipment.
What should you do about it?
Data and technology are key areas to aide in compliance with the new lease accounting changes. Companies should start centralizing the tracking of leasing inventory and key data for each lease. This will be critical in understanding the lease values that will be added to the company’s balance sheet. Understanding how your current leasing software supports or plans to support the lease accounting changes is also critical. System changes require planning and can take time to implement.
Start the process now to ensure you are ready to support the new lease accounting rules. Watch our webinar on “TRIRIGA FASB Lease Accounting Compliance“.
Now that you know about FASB’s new lease accounting standards, here are 5 tips shared by our lease accounting experts. If you have any questions about FASB or want to talk to one our Real Estate Experts,
The JLL Team