The Financial Accounting Standards Board (FASB) is in the process of ratifying the final draft of the revised leasing standard. The new requirements will bring lease assets and liabilities onto most company's balance sheets. The draft requires substantial changes to lessee accounting that may call for new systems and internal controls. Going further, there will be significant changes to the lease obligations on many balance sheets. The final draft is not expected to have an impact on landlord's current accounting treatment of leases. However, the impact on lease negotiations with current and prospective tenants may be affected by the tenant's concern over the new accounting treatment. It is expected that the draft will be complete by early 2016.
To give you a sense of what can be expected once FASB issues final regulations, here are some highlights based on the current draft.
Right-of-Use Principle: The standard states that a lease provides the right to control the use of an asset. This right of control creates an asset and a liability for lessees that must be reflected on the balance sheet.
Type A/Type B Leases: For the most part, existing capital/finance leases will be accounted for by lessees as Type A leases. The lessee will recognize amortization of the right-of-use asset separate from the interest on the lease liability. Generally, lessees will recognize operating leases as Type B, with a single total lease expense.
For both types of leases, lessees must recognize a right-of-use asset as well as a lease liability.
Accounting by the Lessor: Lessor accounting for U.S. GAAP would follow the current model. Type A leases will be those that are effectively a financing or sale. Type B leases will be operating leases. Under Type A leases, the lease transfers most of the risks and the rewards associated with owning the underlying asset. Most real estate leases will be considered Type B leases.
Short-term Leases: For leases with a term of one year or less, it will not be necessary to present them on the balance sheet.
Portfolio Approach: For leases that are similar in nature, age, and value, lease guidance will be permitted at a portfolio level.
Variance from IASB: The International Accounting Standards Board (IASB) is seeking a single approach for lessee accounting. Under IASB, a lessee and lessor would account for all leases as Type A.
Proposed Effective Dates
Questions? Contact your Berdon advisor or Seth Molod, CPA, at 212.331.7420 |