On February 26, 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2016-02 – Leases. This landmark standard will change the entire financial reporting landscape for entities that are a-party to Operating Lease Agreements as lessees.
The new standard will require entities to record a “Right-of-Use” asset and an Operating Lease Liability at the time the Lease is entered into or when this accounting standard is adopted. The Right-to-Use asset represents the net present value of lease payments over the term of the lease, adjusted for lease prepayments, lease incentives received and the lessee’s initial direct costs. The Operating Lease Liability is measured by the net present value of the lease payments over the term of the lease. The Asset is amortized over the term of the lease on a straight-line basis and the Liability is reduced over the term of the lease as lease payments are made. The standard applies to all Operating Leases except those with an initial term of less than 12 months.
The standard is effective for years beginning after December 15, 2018 (calendar year 2019) for public companies and for years beginning after December 15, 2019 (calendar year 2020) for non-public companies and not-for-profit organizations.
There will be much more to come on this standard and the implementation thereof given the significant effects it will have on loan agreements, basic financial ratios and lease vs. buy decisions by lessees. Alerding CPA Group will keep you up-to-date on how this unfolds in the years to come.
If you have any questions, please contact your Alerding CPA Group representative at 317-569-4181 or visit our website: www.alerdingcpagroup.com.