March 8th, 2016 Changes to Lease Recognition By Linda Marie Pearson, CPA, CFE Financial Accounting Standards Board (FASB) has just amended the FASB Accounting Standards Codification (ASC) related to leases. FASB issued Accounting Standards Update No. 2016-02, Leases (Topic 842) to communicate how the ASC was amended. Here are the highlights of the change: Main Provisions to the Current Recognition Method Companies will be required to record lease assets and lease liabilities by lessees for those leases classified as operating leases under previous accounting principles generally accepted in the United States of America. Effective Date For fiscal years beginning after December 15, 2019. Early application is permitted. Who is Affected? Applies to a majority of non-publicly traded entities and not-for-profit organizations. Prior to the Amendment Companies are currently only required to provide disclosures regarding operating leases and to expense the lease payments on a straight-line basis over the term of the lease. Main Provisions A lessee should recognize in the statement of financial position a liability to make lease payments (the lease liability) and a right-of-use asset representing its right to use the underlying asset for the lease term. When measuring assets and liabilities arising from a lease, a lessee should include payments to be made in optional periods only if the lessee is reasonably certain to exercise an option to extend the lease or not to exercise an option to terminate the lease. Similarly, optional payments to purchase the underlying asset should be included in the measurement of lease assets and lease liabilities only if the lessee is reasonably certain to exercise that purchase option. In addition, a lessee should exclude most variable lease payments in measuring lease assets and lease liabilities, other than those that depend on an index or a rate or are in substance fixed payments. For leases with a term of 12 months or less, a lessee is permitted to make an accounting policy election by class of underlying asset not to recognize lease assets and lease liabilities. For leases with terms exceeding 12 months, the measurement of the right-of-use asset and liability is initially measured at the present value of the lease payments. Implementing Modified retrospective approach For the complete ASU, [click here], or to discuss how ASU 2016-02 will affect your organization, please contact me at 401-752-0566.