FASB Issue Response to Technical Lease Accounting Queries
In a recent news update, The Financial Accounting Standards Board (FASB) disclosed that its staff have received numerous technical enquiries relating to certain aspects of the lease accounting standard.
FASB announced a new standard for lease accounting, formally known as ASC 842, in February 2016. The new guidelines, which take effect for most companies starting in 2019, will require lessees to recognise a right-of-use asset and a lease liability on balance sheet for almost all leases (a short-term lease recognition and measurement exemption exists for leases with a term of 12 months or less). Public companies are required to apply the new standard for annual periods beginning after 15th December 2018, and interim periods within those years. For all other companies, it is effective for annual periods beginning after 15th December 2019. Early adoption is permitted for all entities.
FASB has stated that most of the technical enquiries received predominantly focus on several specific areas of the new lease accounting standard, including the following:
- The Definition of a lease
- Lessee Accounting
- Lessor Accounting
- Discount rate
- The Transition to ASC 842
FASB also specified that from these enquiries, lessee accounting and transition make up most of the questions. Noting that this is likely because lessee accounting is the fundamental focus of the new standard, and since the transition will be one of the initial implementation processes an organisation must undertake.
In response to these questions and based on existing trends from reoccurring enquiries, FASB has identified several useful considerations to contemplate when preparing to adopt ASC 842.
Firstly, FASB suggests that organisations ought to consider if a contract has been accounted for as a lease under existing lease accounting principles, ASC 840. The reasoning behind this is that most contracts that are currently accounted for as a lease will continue to be accounted for as a lease under the new standard. Taking that into consideration, for any organisation in the early stages of its implementation process, examining existing lease contract is a good starting point.
Secondly, for the most part, lessor accounting remains largely unchanged. However, lessors must be aware that some subtle differences do exist to ensure it aligns consistency with the control measures under the imminent revenue recognition standard. FASB provided the following example : – ‘Lessors should consider whether the new standard may change their current accounting for receivables’.
Lastly, as under new accounting principles, lessees will be required to recognise a right-of-use asset and lease liability arising from an operating lease on balance sheet, it is suggested that these lessees should ensure they fully understand the guidance for lease and non-lease components as well as the discount rates.
FASB says it is preparing to publicly discuss the implementation of the new standard and are planning to provide an additional update on the key issues and next steps before the end of 2016. It also noted that at present, for lease accounting, the FASB does not believe there is a necessary requirement to formulate a standing transition resource group, comparable to the one created for the revenue recognition accounting standard.
FASB concluded by affirming that organisations should continue to monitor and evaluate the effects of ASC 842 in an effort to achieve a successful implementation and that it is ready to field any further technical enquiries and address any concerns about the implementation of the new standard.
Planning is key to a successful transition
Early planning and preliminary assessment is key to determining how the new lease accounting standard will impact your company’s financial statements and key performance metrics as well as being fundamental to a successful transition process.
To help facilitate a successful transition and to turn compliance into an opportunity for savings and return on investment (ROI), many smart companies are turning towards automated lease accounting solutions.
Solutions of this nature allow organisation to produce all the accounting information required to accurately complete the financial statements obligatory for compliance; including income statement, cash flow and balance sheet. The most advanced solutions will even run critical amortisation schedules, journal entries and disclosure summaries, as well as account for all lease categories or lease types at an asset level.
With numerous transition and implementation challenges, companies must act fast if they are to successfully comply with the new standards in time for the implementation deadline.
To find out more about the new lease accounting standard: Follow the link to access a short FASB ASC 842 fact sheet.