The New Lease Standard – Everything You Need to Know
The new lease standard (ASC 842 and GASB 87 in the U.S. and IFRS 16 internationally) is intended to account for all lease obligations on financial statements, rather than excluding operating leases as has been the standard. This change ensures that a company’s financial situation is reflected as accurately as possible within the financial statements.
With the new standard, all leases must appear on the balance sheet as a Right of Use (ROU) Asset and Lease Liability.
Public and international companies must begin using the new lease accounting standard during their fiscal year that occurs after Dec. 15, 2018. Non-public organizations must comply for their fiscal year after Dec. 15, 2019
Update on May 20, 2020
FASB voted to delay the deadline one year for non-public companies, which would make the new effective date the fiscal year starting after Dec. 15, 2021. This comes after a proposal to delay in April 2020, and a previous vote to delay in October 2019.
Why the change?
Under the previous lease standard, ASC 840, payment obligations of “operating” leases are not reflected on the balance sheet even if you have committed to many years of payments. In other words, there is a future debt (a liability) that is nearly invisible on financial statements. Those payments are mentioned in the footnotes, but not prominently among other liabilities on the balance sheet.
Many organizations have dozens, or even hundreds, of operating leases, which can result in a huge gap for anyone trying to understand that company’s financial situation via their balance sheets. This is why FASB made the change.
Contact ProNexus for help with the New Lease Standard today!