FASB Issues Lease Accounting Standard
Today, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (ASU) No. 2016-02, Leases (Topic 842). The long-awaited guidance is intended to improve financial reporting for leasing transactions. The FASB estimates that there is over $1 trillion of off-balance sheet operating lease commitments for SEC registrants based on a 2005 Securities and Exchange Commission report.
The new guidance will require lessees to recognize a right of use asset and related lease liability. Using the classification similar to Topic 840, the ASU identifies financing leases and operating leases. Financing leases would recognize amortization and interest expenses, while operating leases would recognize a single lease expense on a straight-line basis. There is also a recognition and measurement exemption for short-term leases.
The effective date for public entities is fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Private entities will have a delayed effective date of one year to allow for implementation. Early adoption is permitted for all organizations.