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Focus on Assurance: Financial Reporting Over Lease Transactions

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The Financial Accounting Standards Board (FASB) has released an Accounting Standards Update (ASU) designed to improve financial reporting over lease transactions. The ASU will impact all companies and other organizations that lease assets, including real estate, equipment and other personal property.
February 26, 2016

The Financial Accounting Standards Board (FASB) has released an Accounting Standards Update (ASU) designed to improve financial reporting over lease transactions. The ASU will impact all companies and other organizations that lease assets, including real estate, equipment and other personal property.

The FASB undertook this project with the International Accounting Standards Board in 2006. There were two different exposure drafts and a preliminary views for comment issued by the FASB, with numerous comment letters.

Under this ASU, a lessee will be required to recognize assets and liabilities for leases that have a term of more than 12 months. Recognition, measurement, disclosure and presentation of cash flows will be determined by the lease being either a financing lease or an operating lease. Both types of leases will be required to be recognized on the balance sheet.

Under operating leases, the lessee will be required to recognize a right of use asset and a lease liability (measured at the present value of the lease payment). The lessee will recognize a single lease cost calculated so that the cost of the lease is allocated over the lease term on a generally straight line basis. All cash payments under these lease agreements will be categorized as operating cash flows.

Under a financing lease, the lessee will also be required to recognize a right of use asset and a lease liability, measured at the present value of the lease payments. Interest on the lease liability will be recorded separately from amortization of the right to use asset. Repayments related to the principal will be treated as financing cash flows and interest payments will be recorded within operating activities on the statement of cash flows.

A lessee can make an election not to recognize lease assets or lease liabilities for those leases with a term, inclusive of all available extensions, of 12 months or less. If this election is made, lease expense should be recognized on a straight line basis over the life of the lease.

Lessor accounting will remain primarily unchanged under this new ASU. Recent pronouncements over revenue recognition have been considered in this ASU to allow for better conformity.

The ASU will be effective for public companies for fiscal years and interim periods beginning after December 15, 2018. For all other organizations, the ASU on leases will take effect for fiscal years beginning after December 15, 2019, and for interim periods within fiscal years beginning after December 15, 2020. Early application will be permitted for all organizations.

See a copy of Section A of the ASU, Section B and Section C.

For more information please contact RubinBrown’s Assurance professionals.

 

Readers should not act upon information presented without individual professional consultation.

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