This Insights article was contributed by Sandy Crumrine, CPA, CIA, an audit partner at Earney & Company, L.L.P.
In February 2016, the Financial Accounting Standards Board (FASB) issued “ASU No. 2016-02, Leases,” changing the way business in all sectors will account for leases.
This new lease standard will go into effect for public companies and some not-for-profits and employee benefit plans with fiscal years beginning after Dec. 15, 2018. For all other organizations, the standard is effective for fiscal years beginning after Dec. 15, 2019. Early application is permitted.
The most significant change for the new lease standard will be lessees must now recognize operating leases as assets and liabilities on the balance sheet. Prior to the new standard, only capital leases were recognized on the balance sheet, while operating leases were included as expenses on the income statement and disclosed in the financial statements.
The lease term will be another key item to look out for. Any lease shorter than 12 months will not be required to be listed as an asset and liability on the balance sheet, as long it does not have the option to buy the asset at the end of the lease. Lessees are only required to recognize lease assets and liabilities for leases with terms of more than 12 months.
A lessee will generally be required to initially measure both the asset and liability at the present value of the remaining lease payments. Lessees will also capitalize initial direct cost as part of the asset. Subsequent measurements will depend on the type of lease.
For financed leases, a lessee will recognize rental expense in a similar manner to capital leases. A lessee will recognize interest expense based on the interest rate implicit in the lease, its incremental borrowing rate, or the risk-free rate, if applicable, and amortize the asset over the shorter of its useful life or the lease term. For operating leases over 12 months, a lessee will recognize rental expense on a straight-line basis over the lease term.
If you answer yes to any of the following questions, the lease should be classified as a financed lease:
Conservation Group Signs $8M Deal To Buy The Point On Topsail Island
Audrey Elsberry
-
Mar 26, 2024
|
|
National Organization Bestows Top Award On Cape Fear Professional Women In Building
Staff Reports
-
Mar 26, 2024
|
|
Engineering Firm Hires Four Employees
Staff Reports
-
Mar 26, 2024
|
|
N.C. Ports Officials React To Baltimore Bridge Collapse
Audrey Elsberry
-
Mar 26, 2024
|
|
NCino's Fourth-quarter Earnings Signal Rebound From Liquidity Crisis
Audrey Elsberry
-
Mar 27, 2024
|
The N.C. Blueberry Festival, founded in 2003, is one of several events in Pender County that have drawn more attention over the years....
The planning for Pender Commerce Park began in the early 2000s when the county wanted to create an economic driver on its largely rural west...
Jack Fleming, owner of Socialry Marketing & Scourz and emcee for 1 Million Cups Wilmington, shares his media and tech picks....
The 2024 WilmingtonBiz: Book on Business is an annual publication showcasing the Wilmington region as a center of business.