This Insights article was contributed by Sandy Crumrine, CPA, CIA, an audit partner at Earney & Company, L.L.P.
In February 2016, the Financial Accounting Standards Board (FASB) issued “ASU No. 2016-02, Leases,” changing the way business in all sectors will account for leases.
This new lease standard will go into effect for public companies and some not-for-profits and employee benefit plans with fiscal years beginning after Dec. 15, 2018. For all other organizations, the standard is effective for fiscal years beginning after Dec. 15, 2019. Early application is permitted.
The most significant change for the new lease standard will be lessees must now recognize operating leases as assets and liabilities on the balance sheet. Prior to the new standard, only capital leases were recognized on the balance sheet, while operating leases were included as expenses on the income statement and disclosed in the financial statements.
The lease term will be another key item to look out for. Any lease shorter than 12 months will not be required to be listed as an asset and liability on the balance sheet, as long it does not have the option to buy the asset at the end of the lease. Lessees are only required to recognize lease assets and liabilities for leases with terms of more than 12 months.
A lessee will generally be required to initially measure both the asset and liability at the present value of the remaining lease payments. Lessees will also capitalize initial direct cost as part of the asset. Subsequent measurements will depend on the type of lease.
For financed leases, a lessee will recognize rental expense in a similar manner to capital leases. A lessee will recognize interest expense based on the interest rate implicit in the lease, its incremental borrowing rate, or the risk-free rate, if applicable, and amortize the asset over the shorter of its useful life or the lease term. For operating leases over 12 months, a lessee will recognize rental expense on a straight-line basis over the lease term.
If you answer yes to any of the following questions, the lease should be classified as a financed lease:
Vantaca’s Balancing Act
Audrey Elsberry
-
May 17, 2024
|
|
Channel, UNC Law School Aid Wilmington Small Businesses
Audrey Elsberry
-
May 16, 2024
|
|
Developers Mark Opening Of $78M Apartment Project At Riverlights
Staff Reports
-
May 17, 2024
|
|
Two Apartment Projects Pitched For Kerr Avenue
Emma Dill
-
May 17, 2024
|
|
As Hurricane Season Heats Up, How Do Builders, Laws Prep Homes For Storms?
Emma Dill
-
May 17, 2024
|
The top half marathon in each state was crowned based on nearly 20,000 votes from runners across the country....
The damage caused by Hurricane Florence in 2018 throughout the region put a bigger spotlight on the need for the construction industry to fa...
The 2024 WilmingtonBiz: Book on Business is an annual publication showcasing the Wilmington region as a center of business.