After much anticipation, the Financial Accounting Standards Board (FASB) issued final guidance on lease accounting, Accounting Standard Update (ASU) No. 2016-02, Leases. Initiated to address transparency concerns, the new guidance will bring a majority of leased assets onto the balance sheet, virtually eliminating “off-balance sheet” accounting.

Unlike current Generally Accepted Accounting Principles (GAAP), this accounting update will require nearly all leases to be recognized on the company’s balance sheet by the lessee. Commonly, these include real estate, equipment and other lease arrangements.

With this ASU, FASB accomplishes the majority of its initial project goals for lease accounting, however lessors’ accounting remains largely unchanged. The majority of lessor accounting changes will be implemented when the new revenue recognition policy is effective.

FASB Chairman Russell Golden said in a statement, “It ends what the U.S. Securities and Exchange Commission and other stakeholders have identified as one of the largest forms of off-balance sheet accounting.” Golden also stated “The new guidance responds to requests from investors and other financial statement users for a more faithful representation of an organization’s leasing activities.”

When it Takes Effect

The amendments in this update are effective for fiscal years beginning after Dec. 15, 2018, including interim periods within those fiscal years for public companies, non-profit entities that have issued or is a conduit bond obligor for traded securities, and employee benefit plans filing with the SEC.

All other non-public businesses should apply amendments for the fiscal years beginning after Dec. 15, 2019, and interim periods within fiscal years beginning after Dec. 15, 2020.

Early application of the amendments is permitted for all entities.

Start Preparing Today

Although the implementation deadline is still years away, be proactive by understanding the impact the new standards will have on your financial statements and its other effects including those on any debt covenants, such as debt to equity ratios. If you need help preparing your business to meet this standard’s new requirements, contact Doeren Mayhew’s accounting, audit and assurance advisors today.

Stay tuned as Doeren Mayhew offers more insight on lease accounting.