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The New Leasing Standards and The Implementation Challenge

After years of discussion and a host of draft documents, in January of 2016 the Financial Accounting Standards Board and the International Accounting Standards Board each released new mandates related to accounting for leases.

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After years of discussion and a host of draft documents, in January of 2016 the Financial Accounting Standards Board and the International Accounting Standards Board each released new mandates related to accounting for leases.

There may be some business owners that know what the new FASB ASC 842 lease accounting rules are—and the imminent deadlines; most likely, they have already enlisted a multi-department task force to address it. But if you’re in the statistical majority—the 78% who aren’t ready—there is a lot of work left to be done. Being caught in the middle of preparation, transition and testing is where the real work gets done. It’s also where mistakes, delays, and problems happen.

But don’t worry, we are here to assist. Over the coming weeks, we will launch a series of articles that will be a complete resource for the complications, challenges, and trials companies face as they coordinate accounting, finance, IT, and lease administration resources to tackle FASB ASC 842.

As we’ve worked with clients who are dealing with the new FASB ASC 842 standard we’ve seen some challenges emerge. This series of articles will provide a clear and candid outline of the mistakes and trials you’ll encounter along the way. They’ll be your guide on what not to do as your team navigates the new lease administration rules.

These articles are not intended to be a “what is FASB ASC 842?” guide, though we will summarize the new standards for you. Instead, they will be a guide for implementation…because right now that is where you should be in your process. We hope this helps you discover the challenges in advance, so you can complete the process with the least amount of time, expense and disruption.

A Quick Summary on the New FASB ASC 842 Leasing Standard

In January 2016, after years of discussion and a host of draft documents, the Financial Accounting Standards Board and the International Accounting Standards Board each released new mandates related to accounting for leases. While companies have always had to disclose their lease data, they’ve generally done so only in the footnotes to their financial statements. The SEC estimated that there are over $1.25 trillion in off-balance sheet lease obligations. This guidance will help change that and give the readers of these financials a much better idea of these obligations. The new lease accounting rules will move all lease agreements (other than leases less than 12 months) onto the balance sheet. All leases will now be considered “right-of-use” assets and a lease liability to make future payments.

FASB Lease Classification

FASB has retained a two-part classification for leases.

  1. Finance Leases
  2. Operating Leases

This will require companies to evaluate all leases and make a judgement on the type of lease under the new standard.

Finance Leases – Leases are considered finance type if:

  • The lease automatically transfers ownership of the property to the lessee by the end of the lease.
  • The lease contains a bargain purchase option.
  • The lease term is for a major part of the estimated economic life of the property.
  • Payments represent substantially all of the fair value of the asset.
  • ROU will be amortized separately on the income statement from interest expense.
  • The fair value and economic life test are expected to be similar to the 90% and 75% tests under existing GAAP guidance.

Operating Leases – All other leases would be considered operating type leases.

Lease Types

Real estate agreements are an obvious form of lease financing for companies, but other lease types are included in the mandate as well. Equipment leases, vehicle leases, embedded leases, and master leases of more than 12 months must all be considered.

Lease of intangible assets, inventory, assets under construction, biological assets—as well as leases for exploration of or use of minerals, oil, natural gas and similar resources—are excluded. Also note, a lease can be a portion of a contract and embedded in another agreement. Just because it says “service contract” does not mean that it should be excluded from analysis!

In our next article, we’ll discuss the six points of implementation failure that, if not handled properly, can be fatal to the on-time delivery of a final solution.

blumshapiro is presenting this series of articles in collaboration with AMTdirect, a North Carolina-based software provider that offers the most robust lease administration and accounting compliance technology on the market, helping clients organize and manage real estate and other contracts while complying with the complex new FASB ASC 842, IFRS 16, and GASB lease accounting standards.

If you have questions or require further clarification please contact Jennifer Hogencamp at 401-330-2735 or at jhogencamp@blumshapiro.com.

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