New Lease Accounting is Here
By Megan Craven
Does your organization lease vehicles, office space, copiers, or other equipment? If so, you will need to implement the new lease accounting standard update, Update 2016-02 – Leases (Topic 842). The effective date for nonpublic entities is for fiscal years beginning after December 15, 2021; therefore, for calendar years ending on December 31, 2022, the annual financial statements will need to implement Topic 842.
Previously, operating lease obligations were not reflected on the balance sheet, despite the fact that the organization had committed to such payments. These leases were disclosed in the footnotes, but the leases were not clearly reflected on the financial statements. The reason for the change is to provide more transparency to financial statement users.
What are the changes you can expect?
- Leases will fall into one of two categories: operating leases or finance leases (previously capital leases).
- Lessees will record a right-of-use (ROU) asset and a lease liability on the balance sheet.
- For an operating lease, the lessee will recognize lease expense on a straight-line basis over the lease term.
- For a finance lease, the lessee will recognize both amortization expense and interest expense.
- Additional disclosures in the financial statements will be required.
These changes could drastically affect the look of your financial statements as well as change bank covenants. So, make sure you have considered the effects on any financial statement covenants and discussed them with the users of your financial statements. Your organization will also need to make decisions regarding policies related to leases. Does it make sense for your organization to continue to lease equipment or would purchasing be a better option?
If you haven’t started thinking about leases, stop procrastinating! You are almost out of time. Reach out to your accounting service provider to make sure you are ready for these changes.
The information contained in this article is for informative purposes only and should not be relied on when making any business, legal, or other decisions. This information may be updated without notice and/or may not contain the most current information that is available related to this topic. Please consult with your advisor to determine how this information applies to your specific facts and circumstances.