On Feb. 25, 2016, the FASB issued the long-awaited standard on leases (ASU 2016-02, “Leases (Topic 842)”) in three sections:
This standard is the culmination of what began as a joint project of the FASB and the IASB in order to bring most leases on balance sheet. Because most leases today are considered operating leases and are not accounted for on the lessees’ balance sheets under U.S. GAAP, the significant change under the new standard is that those operating leases will be recorded on the balance sheet.
All leases, whether finance or operating, will be on balance sheet unless they are subject to the short-term lease accounting policy election. Consistent with current GAAP, lessees will be permitted to make an accounting policy election to not recognize lease assets and liabilities for short-term leases (that is, lease terms that are 12 months or less, subject to certain conditions).
The standard defines a lease contract as one that conveys the right to control the use of an asset for a time period in exchange for consideration. The right to control the use of an asset includes an assessment of the customer’s rights to obtain substantially all of the economic benefits from the asset and to direct the use of the asset.
For lessees, operating leases will come on the balance sheet with an asset to represent the right to use the leased asset and a liability to represent the lease obligation. As a result, balance sheets will be bigger, and stakeholders will have a more complete picture of an organization’s leasing activities and the financial effects of those activities.
Effective Dates and Transition
The leases standard is effective for PBEs in fiscal years beginning after Dec. 15, 2018, including interim periods in those fiscal years, which first applies to March 31, 2019, interim financial statements for calendar year-end PBEs. Early adoption is permitted, and practical expedients are available for transition.