Question

• New lease accounting standard impact:

When are lessees and previous property owners required to adopt the new standard?

When are lessors required to adopt the new standard?

• Pls provide a summary of the potential impact. It would be better if you provide the resources, websites are enough.

Answer 1

ASC 842

Accounting Standards Codification Topic 842, also known as ASC 842 and as ASU 2016-02, is the new lease accounting standard published by the Financial Accounting Standards Board (FASB). It will replace the previous US GAAP leasing standard, ASC 840, which is almost 40 years old. The purpose of the new standard to close a major accounting loophole in ASC 840: off-balance sheet operating leases. Public companies began to implement the standard starting after December 15, 2018. Private companies will follow a year later on December 15, 2019.

When certain costs incurred by a lessor as the owner of an underlying asset are paid by a lessee—either directly to a third party on behalf of the lessor or as a reimbursement to a lessor—the new lease accounting standard requires lessors to report these costs as both revenue and expenses. Concern was expressed about the cost and complexity to the lessor of determining such costs when paid by a lessee directly to a third party. Even if such information were made available to the lessor, questions arose as to the reliability of such information. As a result, the ASU requires lessors to exclude from variable payments (i.e. revenue) lessor costs paid by a lessee directly to a third party. In addition, the ASU clarifies that costs reimbursed to the lessor by a lessee should be considered variable payments and, therefore, excluded from contract consideration.

For lessors that have not yet adopted the new lease accounting standard, the ASU will be effective upon adoption of ASC 842. If an entity has already early-adopted the new lease standard, the lessor has a choice of whether to retrospectively or prospectively apply these changes as outlined within the ASU.

Impact to the Balance Sheet

There will be an increase in assets and liabilities on the balance sheet. Under the ASC 840, leases were classified as either capital leases or operating leases. While capital leases were recorded on a company’s balance sheet, the operating leases were not. The new ASC 842 standard changes the types of classifications and the balance sheet treatment. Going forward, under the new standards, both classifications of leases, operating and finance, will be capitalized on the balance sheet. There are a few exceptions, such as certain short-term leases less than or equal to 12 months in duration. However, in most cases a right-of-use (ROU) asset will be recognized on the balance sheet along with a corresponding liability for the lease obligation.

Impact to the Income Statement

The treatment of operating and finance leases will differ on the income statement under the new ASC 842 standard. For finance leases, the interest and amortization of the lease are presented separately on the income statement. However, for operating leases, the two are combined into a single line-item. With operating leases, a straight-line expense profile typically results. With finance leases, the expense profile is typically front-loaded due to the separate interest