Lease accounting rules overhauled
The rules describing how to account for all leases were drastically revised on February 25, 2016. That is when the accounting rule setters, FASB, issued their document called Accounting Standards Update 2016-02 – Leases (Topic 842).
You will be hearing a lot more about these changes over the next few years.
(Cross post from my other blog, Nonprofit Update. Although written for an audience of charity finance staff and senior leadership, this is a helpful headsup notice for CPAs.)
In extremely brief summary, the new rules require all entities preparing financial statements (including nonprofit organizations) to record all leases as an asset and liability. The assets will be called right to use assets and will be amortized over the life of the lease. An offsetting liability will be recorded. Whether the asset will be reported at the sum of total future payments or at the discounted present value of future payments would depend on the nature of the lease.
Biggest impact is expected to be entities that have a lot of leased real estate, manufacturing equipment, or airplanes.
Although the magnitude won’t be anywhere near as high as for those types of companies, there will be an impact on essentially every NPO. Any charity leasing copiers, phone systems, or office space will see an impact on their financial statements.
You don’t need to worry about this change right away. Here is the technical description of the effective dates:
The amendments in this Update are effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years, for any of the following:
- A public business entity
- A not-for-profit entity that has issued, or is a conduit bond obligor for, securities that are traded, listed, or quoted on an exchange or an over-the-counter market
- An employee benefit plan that files financial statements with the U.S. Securities and Exchange Commission (SEC).
For all other entities, the amendments in this Update are effective for fiscal years beginning after December 15, 2019, and interim periods within fiscal years beginning after December 15, 2020.
Early application of the amendments in this Update is permitted for all entities.
I always find it helpful to translate the effective dates into the first financial statements that will be affected. For a simplification, for public companies this will first be effective for financial statements issued December 31, 2019.
For private companies, such as practically every charity, these new rules will be first effective for financial statements issued December 31, 2020. If you have a June year-end, these rules will be required for your 6/30/21 financial statements.,
While 12/31/20 financials are about five years away as we are now thinking about 12/31/15 reports, that isn’t very far in the future.
In addition to only being a few fiscal years out, the changes will need to be reflected in any prior year comparative information that is presented.
It is my perception that most charities present two years of comparative data, sometimes three years. This means if the first implementation is for 12/31/20, the information will have to be accumulated for calendar years 2019 and 2018. That is not very far away.
It would be wise to put learning about the new lease accounting rules on your 2016 to do list.
If you want a high-level summary, check out the 2/25 news release: FASB Issues guidance on Lease Accounting.
If you want the full document you can find it here. Look for Update 2016-02 – Leases. The document is in three parts.