FASB New Lease Accounting Standards
Due to the new lease accounting standards which were announced by FASB and IFRS by IASB, all
industries are facing major changes in lease accounting. The new lease accounting standards want you to report
most of your operating leases on the balance sheet by 2019 that is increasing the transparency. This
will help in increasing the interest from auditors, lenders and analysts. Further, this will impact IT
systems operational functions, taxes and internal controls.
Before beginning let us understand what is lease accounting?
Well lessor is someone who rents something he owns and the lessee is someone who pays for that assets periodically and lease is agreement between both of them. Now lessee will pay the lessor periodically and lessee will invest on the asset in order to earn more than the cost of lease thus meeting there respective needs. Accounting by lessee begins with lease aggression and further decision to decide if it is capital lease or operating lease. In case of operating lease no asset and liability is recorded on balance sheet. Lease payments are reported as expenses where as in capital lease both asset along with depreciation expense and liability with interest expense are recorded on the balance sheet of lessee. For lessor leased asset would be recorded on balance sheet in case of operating lessee and will claim depreciation on asset. In case of capital lease and lessor shall recognize asset which is under a finance lease as receivable amount which would be equal to total investment on asset in there balance sheet. In this case the interest will be seen as income and principle repayment will decrease the total investment on asset in their balance sheet. Lease payments are determined by the lessor who will find a fair value of its lease asset which lessee will pay on desired rate.
Leasing avoid obsolescence of assets flexibility in contracting , lessee borrowing rate may be more than that of lessor borrowing rate, if the lease is structured properly then in that case no asset and liabilities are recorded on lessee balance sheet which is very beneficial as asset in not recorded, total turn over appears stronger and it looks like more effective use of asset by lessee and debt equity ratio looks stronger and lessee look less insecure.
Leasing is an important source of finance and FASB wants to provide better transparency around leasing
transactions of company. Now FASB lease accounting standards has a dual lease accounting model that has replaced finance lease
and operating lease by type A and type B terminology, however both of them are now capitalized where
as IFRS has single lease accounting model and no one lease classification test. Now FASB has restored
the 75% of useful life and 90% of fair value in the guidance with no exception for small leases where as
IFRS provide exemption for small leases IFRS treats all leases as purchase of right of use asset as finance
leases. FASB treats operating leases as executory contract in P and L. Other differences may include sale
lease backs and transition rules.
Well there are several challenges today like
If all operating leases had to be capitalized under he existent rules and this is where the most of the
work is that is, Data and document gathering, tracking and linking assets and liability, accounting and
reporting, restoring documents accessing the tax issue postponing income tax etc. There are additional
changes with further rules relating to changes which are not significant like
new disclosure requirements, fundamental changes or increasing critical observation. There is possible
need for reassessment of FAS/IAS differences, moreover the estimates allowed for breaking down of
components. Requirements for the transition period includes multiples sets of books, effective
beginning of comparative period and opportunity for organisation to gain control and overpaying on
What you need to do is don’t delay take inventory, look at spend management system and plan for future.
This is important because organisations will need to make sure the liabilities they have make the most
sense for financial picture of organisation which will be shown on balance sheet for future leases this
would require increased oversight on their current and future lease for this you may require new
processes to develop and maintain. In assisting companies Joyce CPA, LLC stands ready in assisting the
companies by performing a detailed assessment in order to lay down the foundation for the new lease
standards. Joyce CPA, LLC has been helping the companies in managing change in their account
throughout the firm history.
To know more about the Lease accounting services offered by Joyce CPA, LLC, please visit here.