As the Financial Accounting Standards Board (FASB) continues to field inquiries about its new lease accounting standard, it has found that the questions turn on three key trends recently described in the board’s quarterly newsletter.
The FASB issued its long-awaited lease accounting standard in February, which will require companies to recognize assets and liabilities from operating leases on their balance sheets. Public companies will be required to adopt the new standard for fiscal years, and interim periods within those fiscal years, beginning after Dec. 15, 2018.
FASB staff has received technical inquiries that have mainly focused on the following five areas of guidance:
- Definition of a lease
- Lessee accounting
- Lessor accounting
- Discount rate
- Transitioning to the new standard
“Lessee accounting and transition have received the most inquiries,” the FASB says. “This is likely because lessee accounting is the main focus of the standard, and because transition is one of the first areas that organizations consider as part of the implementation process.”
While most of the questions have been fact- and circumstance-specific, there are a few general trends that the FASB has identified.
1. Consider if a contract has been accounted for as a lease under existing accounting guidance. Most contracts that are accounted for as leases today will continue to be under the new rules.
2. Lessor accounting isn’t significantly different. But there are subtle changes to make sure it aligns with the control principle under the new revenue recognition accounting standard, which goes into effect starting in 2018. One example: Consider if the new standards may change their current accounting for lease receivables.
3. Lessees will now recognize operating leases on the balance sheet. So, those lessees should understand the guidance for lease and nonlease components and the discount rate.
A new video, The Display Approach: A Quick Example, shows how to apply the display approach in recognizing operating leases on the balance sheet. The approach was designed specifically to allow the leverage of existing systems and processes.
The FASB continues to monitor how implementation is progressing. But it has determined that a standing transition resource group, like the one the board formed for the revenue recognition standard, isn’t necessary for the lease accounting standard.
However, the FASB will hold a public discussion of the leases implementation process and provide an update on key issues and the next steps before the end of the year.
About Terry Sheridan
Terry Sheridan is an award-winning journalist who has covered real estate, mortgage finance, health care, insurance, personal finance, and accounting and taxation issues for newspapers, magazines, and websites. A Chicago native and former South Florida resident, she now lives in New England.