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FASB Publishes New Lease Accounting Standard

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The FASB issued Accounting Standard Update (ASU) 2016-02 on February 25, 2016, amending the accounting for leases under GAAP. 

For lessees, FASB adopted a dual approach with the focus on showing a right-of-use asset and a lease obligation liability for the present value of the lease payments on the balance sheet for all leases.  Leases that would be classified as capital leases today will be called Type A leases, for which there will be a lease asset and a lease liability on the balance sheet, and the income statement will reflect amortization of the asset and liability as interest and depreciation rather than rent expense, the same as current GAAP.  Leases that would be classified as operating leases under current standards will be called Type B leases for which the amortization of the asset and liability will be combined as rent expense (not interest and depreciation) recognized on a straight line basis similar to current GAAP.  

For lessors, FASB decided they should account for leases using an approach that is substantially equivalent to existing GAAP for sales-type leases, direct financing leases, and operating leases.  The lessor should determine the classification of a lease based on whether it is effectively a financing or sale rather than an operating lease, primarily by assessing whether the lease transfers substantially all the risks and reward incidental to ownership of the underlying asset.  Type A leases will be those that are financing or sales-type leases, and Type B leases will be operating leases. 

ASU 2016-02 will also require disclosures in the notes to the financial statements about the amounts, timing and uncertainty for the payments they make under the lease agreements. 

The new standard will take effect for public companies in fiscal years beginning after December 15, 2018, (i.e., 2019).  For private companies and not-for-profit organizations, the standard will take effect for fiscal years beginning after December 15, 2019 (i.e., 2020).  Early adoption will be permitted.

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