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Lease accounting is like a tale of two cities, with Companies that have adopted ASC 842 in one and those that have not yet adopted the standard in the other. That means some may be more focused on ongoing activity at the FASB and the impacts of COVID-19, while others are still grappling with implementation challenges. In December 2001 the Board issued SIC‑27Evaluating the Substance of Transactions Involving the Legal Form of a Lease. The IFRS Foundation is a not-for-profit, public interest organisation established to develop high-quality, understandable, enforceable and globally accepted accounting and sustainability disclosure standards. Or the present value of all future lease payments after the Initial Application Date.
CHAPTER 1: NEW LEASE STANDARD IMPLEMENTATION TIMELINE
The criteria that qualify a lease as a capital lease or an operating lease are described below. Lessors classify leases as sales-type leases, direct financing leases or operating leases. In sale-type and direct financing leases, lessors de-recognize the underlying asset, recognize any profit or loss on the asset and establish an investment in the lease. Over the duration of a sales-type lease, the lease accounting lessor records interest income and reduces the balance of the lease investment as they receive cash payments. The lessor accounting for a direct financing lease, which is less like an outright sale, defers any profit/loss on the asset. And for operating leases, which are the least sales-like, lessors retain the asset and related depreciation on their books and simply record interest income.
- Lessors under GASB 87 record a lease receivable and a deferred inflow of resources at the commencement of the lease term.
- Now the basic setting has been set we can move to the balance sheet valuation.
- Examples of leases include rental of office space, photocopiers, computers and servers, vehicles, land, and equipment.
- Similar to straight-line depreciation, this method is required to evenly recognize a fixed asset over its useful life.
The concept of straight-line rent expense requires lessees to charge their total lease liability to expense on an even, periodic basis over the lifetime of the contract. Similar to straight-line depreciation, this method is required to evenly recognize a fixed asset over its useful life. Similarly, straight-line rent expense is calculated by aggregating all rent payments and dividing them by the full contract term.
What Changed with ASC 842?
The key objective is to enhance financial transparency by having the liabilities that asset and property leases incur be represented on the balance sheet. The latest lease accounting standards relevant for compliant property and asset lease accounting management are ASC 842, GASB 87, and IFRS 16. They were published by FASB, GASB and IASB in February 2016, and are effective for public companies since the fiscal year 2019.
Classify repayments of the principal portion of the lease liability within financing activities and payments of interest on the lease liability and variable lease payments within operating activities in the statement of cash flows. When assets are leased between tubs, they may only be accounted for as operating leases, and no gain or sale may be recognized on the transaction. Consult the University’s Internal Billing Transactions Policy and Internal Transfer Policy for the appropriate accounting treatment. To properly implement the new lease accounting changes, organizations should review every contract to ensure all leases, regardless of labeling, are properly included in the financial statements.
GASB 87 Lessor Accounting Example with Journal Entries
A critical part of implementing the new lease accounting standard is reviewing existing contracts, determining what does and doesn’t qualify as a lease, and creating initial journal entries to apply the standard to the balance sheet. Under a finance lease, a lessee records the right-of-use asset and amortizes it over the life of the lease.
