Lease Accounting Changes

7/27/2016

      FASB recently released ASU 2016-02; a new standard for reporting leases. The new standard is designed to increase transparency by recognizing a company’s lease obligations on the balance sheet. Currently, off-balance sheet lease obligations are estimated at 1.25 trillion in the aggregate.


     Previously, leases were classified as either Operating or Capital. FASB is changing the term Capital lease to Finance lease. Criteria for these two terms are about the same; the main difference, is simply the change in name. The dsfasdfnew standard’s substajhjhghntive changes relate to operating leases. In the past, only capital leases were recorded on the balance sheet. Operating leases were recorded only when paid. Under ASU 2016-02, all leases greater thdsfdsaan 12 months in duration are to be recorded on the balance sheet. Once ASU 2016-02 is in effect, many companies, large and small, will recognize significantly greater amounts of liabilities and assets. For many industries, such as airlines, this will be a much truer view of their financial obligations.

     This standard is effective for public companies in years beginning after December 15, 2018 and for private companies the following year. While this is a long lead time, we have commenced planning with many clients as this standard will significantly impact financing choses and debt covenants.

Tags: FASB, Lease