In February 2016, the Financial Accounting Standards Board (“FASB”) issued its highly anticipated leasing standard (Topic 842) in Accounting Standards Update (“ASU”) 2016-02. Private companies and not-for-profit organizations must adopt the new lease accounting standard for fiscal years beginning after December 15, 2021.
The purpose for this new standard is to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the statement of financial position (balance sheet) and disclosing key information about leasing arrangements. The main difference between previous GAAP and the new lease standard is the recognition of lease assets and lease liabilities by lessees for those leases classified as operating leases under previous GAAP. The core principle of the new lease standard is that a lessee should recognize the assets and liabilities that arise from leases. These lease assets and lease liabilities will be recognized as a “right of use asset” and “lease liability” on the statement of financial position.
The new lease standard provides for two transition methods, the modified retrospective approach and the transition alternative. The transition method that you elect to use will determine how the new lease standard is presented in the financial statements. We have highlighted a few of the key differences between the transition methods below.
- For comparative financial statements, present all leases under the new standard on both the statement of financial position and in the disclosures for all periods being presented.
- Any adjustments necessary to net assets would be to the beginning net assets for the earliest period presented. For example, if you are presenting comparative financial statements for calendar year 2022 and 2021, you would need to apply any adjustments to the ending net asset balance as of December 31, 2020, as this is your beginning net asset balance presented in 2021.
- For comparative financial statements, present leases under the new standard only for the current year and present leases in the prior year under the old guidance.
- Any adjustments necessary to net assets would be to the beginning net assets balance for the current year. This would mean you have to include the disclosures for the current year under the new guidance and the disclosures for the prior year under the old guidance.
Everyone should be making sure they can track down all of their lease agreements and thinking of what you can be doing to prepare to implement the changes needed to adopt the new lease standard, as it will be effective for the current year by the time you are reading this. If you have any questions about the new lease standard, please contact your Henry+Horne advisor.
Steven Taylor, CPA