It will also detail how the standard defines and distinguishes a modification from a new lease component and exceptions to some of the more difficult-to-implement provisions (i.e., practical expedients). While it is difficult to cover all aspects of such a large document (over 400 pages), this two-part article will focus on how the standard defines and specifies a contract as a lease or containing a lease, and how the respective parties classify their lease transactions, providing examples of how the standard will affect their accounting. A lessee making this election is required to apply the expedient to an entire class of leases based on the type of underlying asset. For example, one provision allows an entity (of particular importance to the lessee) to make an accounting election to retain off–balance sheet treatment for short-term leases (i.e., 12 months or less). The standard provides a number of practical expedients that will allow parties to avoid some of the more challenging areas of implementation. The standard is replete with examples of how the parties might make such determinations.Īlthough accounting for leasing arrangements under the new standard for the lessor will not be substantively different from existing standards, a lessor’s recognition of selling profit and revenue from lease transactions must conform to a part of Topic 606 regarding revenue recognition if control is not transferred, the lessor will not be allowed to recognize selling profit upfront. Among the more challenging aspects of the new standard are requirements that the parties separate lease components within a contract, and identify and segregate non-lease components. In some instances, these changes will oblige an entity to distinguish between changes that are in essence modifications of an existing lease and those that constitute a new lease arrangement requiring separate accounting. The new rules require ongoing evaluation of leases to determine when an event occurs that may change the recognition or measurement of the lease, such as a change in the lease term or a modification to an existing agreement. A study commissioned by the Chamber of Commerce and other interested stakeholders in 2013 estimated the changes of the new standard would increase the total assets and total liabilities of publicly traded companies by some $1.5 trillion each, of which $1.1 trillion would come from capitalizing existing off–balance sheet real estate leases (Jeff Beatty, Ian Bilenness, Mile Nelson, Amie Sweeney, and Nick Tansey, “Revised Exposure Draft in Lease Accounting Issue: Back on Front Burner,” CBRE Global ViewPoint, June 2013, ). When adopted, the new leasing guidance may have the largest-ever impact of a new accounting standard in terms of gross dollars on the balance sheets of lessees. The modified retrospective approach would not require any transition accounting for leases that have expired prior to the earliest period presented. For example, a calendar-year public company presenting three comparative years would retrospectively apply the guidance to its income statement ending Dec. The standard provides a long transition period however, it requires entities to follow a modified retrospective approach, under which the required changes would apply to leases existing at the beginning of the earliest comparative period presented in the financial statements of the year the new standard is adopted. 15, 2018, and for all other entities, annual periods beginning after Dec. The new standard becomes effective for public business entities, certain not-for-profits, and certain employee benefit plans for annual periods (including interim periods) beginning after Dec. 25, 2016, FASB published a new lease standard that represents a complete overhaul of financial reporting in this area. In part 1 of a two-part series, the authors discuss the changes to the definition and classification of different types of leases and detail the accounting process for lessees. The standard itself is voluminous, and digesting it will be a major task for companies, auditors, and accountants. The new lease accounting standard, released by FASB in early 2016, represents one of the largest and most impactful reporting changes to accounting principles in decades.
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