New accounting rules issued by the Financial Accounting Standards Board (FASB) will require companies that follow U.S. Generally Accepted Accounting Principles (GAAP) to report lease obligations on their balance sheets. This change is intended to improve transparency about current off-balance-sheet leasing activities.
Accounting Standards Update (ASU) No. 2016-02, Leases (Topic 842), will require companies that lease fixed assets (lessees) to recognize all leases with terms of more than 12 months on their balance sheets, regardless of their classification as capital or operating leases. Specifically, a business must report a right-to-use asset and a corresponding liability for the obligation to pay rent, discounted to its present value by the rate implicit in the lease or the lessee’s incremental borrowing rate.
Lessees also will be required to make additional disclosures to help users of financial statements better understand the amounts, timing and uncertainty of cash flows related to leases. They must disclose qualitative and quantitative requirements, including information about variable lease payments and options to renew and terminate leases.
In some cases, businesses might consider buying property they previously would have leased. Under the new accounting rules, the balance sheet impact will be similar for leased and purchased items. In other words, companies can no longer bury operating lease obligations in their footnotes.
The new accounting rules for leases apply to public companies with fiscal years beginning after December 15, 2018, and private companies with fiscal years beginning after December 15, 2019. For more information, contact your Brady Ware Advisor.