For those companies that require audits to be done, here is my office white elephant gift to you this holiday season. In February 2016, FASB issued the Accounting for the New Lease Standard. The birth for these changes were prompted by the naughtiness of Enron and a few other entities (Enron says: “You’re Welcome”).
As a background, there were two types of leases: 1) capital lease and 2) operating lease. Capital leases were capitalized with the underlying assets and lease liability included on the books of the lessee. Operating leases only identified the terms and future minimum lease payments in the notes to the financial statements. So long as the lease agreement was written that it did not satisfy one of four capital lease requirements, then it was considered an operating lease. Oh, the joys of decorating the lease agreement, just so, and keeping the lease amounts off books.
Now, the FASB and IASB (International Accounting Standards Board) wise men say, “Bah humbug” and almost all leases will need to be included in the books of the lessor and lessee. In general, the lessee will record the lease liability and the underlying asset for the lease term. There are two categories of leases for the lessee to consider.
- Financial Lease
- Operating Lease
The lessor has three types of leases to consider.
- Sales-type Lease
- Direct Financing Lease
- Operating Lease
“But wait!,” you may be thinking, there is still the option of an operating lease. I am here to be the Grinch that stole your new lease standard hope. In neither case, under the new lease standard, does the operating lease term closely symbolize the operating lease term under the old standards. It’s like that mischievous Elf on the Shelf that keeps showing up and all you can do is a face palm and shake your head.
The timeline for implementation of this new standard depends on the type of entity. For those entities that are 1) generally a public business entity, 2) generally a not-for-profit entity that has issued securities, or 3) generally an employee benefit plan that files financial statements with the SEC, well your implementation date was for fiscal years beginning after December 15, 2018. For all other entities, the advent of your implementation date is for fiscal years beginning after December 15, 2019. There are some minor exceptions to the effective dates. Those additional exceptions are not discussed in this post. Surprise, FASB permits early application for all entities.
There are some options
to avoid lease accounting under the new lease standard. Be sure to contact your trusted advisor to
review all your leases and your options.
 See ASU 2016-02 for the specific business entities identified.