The Financial Accounting Standards Board (“FASB”) recently voted to proceed with issuing a final standard to revamp accounting for leases. The final accounting standards update is expected to be published in early 2016. For public companies, the upcoming standard will be effective for fiscal years (and interim periods within those fiscal years) beginning after Dec. 15, 2018. For private companies, the standard will be effective for annual periods beginning after December 15, 2019. Early adoption will be permitted for all companies and organizations upon issuance of the standard.
The premise behind the new lease accounting standard is that all leases (whether they are operating or capital in nature) convey the right to control the use of an asset, creating an asset and a liability for lessees that should be recorded on the balance sheet. Under the new standard, most existing capital leases will be accounted by lessees as Type A leases, with recognition of amortization of the right-of-use asset separate from the interest on the lease liability. Most operating leases would be recognized by lessees as Type B leases, with a single total lease expense. Both types of leases would result in lessees recognizing a right-of-use asset and a lease liability. Balance sheet presentation will not be required for leases with a term of one year or less.
The upcoming changes in accounting for leases are an example of the FASB moving away from converging its accounting standards with those of the International Accounting Standards Board (“IASB”). The IASB decided on a single approach, requiring lessees to account for all leases as Type A leases as opposed to the dual approach proposed by the FASB.
With the expected issuance of the standard in early 2016, private companies will have four years before they begin reporting under the new guidance. Companies that have not already done so should consider the potential accounting impact, particularly since there is the requirement to retroactively apply the standard to previously issued financial statements. The timeline for adoption will be even shorter to the extent a company plans to early adopt the standard.
If you have any questions, concerns, or would like additional information on the aforementioned, please contact your HW&Co. Executive or me.