Follow Chad Linkedin
Email Chad Email
Financial
Nov 1, 2017

New Lease Standards

Sponsored Content provided by Chad Wouters - Partner, Earney & Company, LLP

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:

  • Do payments represent substantially all of the asset fair value?
  • Is the lease term for a major portion of the asset’s economic life?
  • Is there a bargain purchase option that the lessee is reasonably certain to exercise?
  • Will title transfer automatically at the end of the lease?
  • Is the underlying asset of such a specialized nature that it is expected to have no alternative use to the lessee at the end of the lease term?
This article is intended to provide a broad overview of the new lease standard. If you would like to discuss this topic further, please feel free to contact our trusted CPAs.

Chad Wouters, CPA joined Earney & Company in December 2006 and became the tax partner in November 2013. With an emphasis on strategy and planning, Chad works with his clients all year to ensure the most efficient tax strategies are put into place.  Earney & Company, L.L.P.  is a CPA firm that handles tax compliance, consulting and planning as well as audit and other assurance services.  For more information please visit www.earneynet.com or call (910) 256-9995.  Chad can also be reached at [email protected].
 

Ecolarge
Ico insights

INSIGHTS

SPONSORS' CONTENT
Deedee gasch

Employee Training: Accident and Claims Prevention

Deedee Gasch - Cranfill Sumner & Hartzog LLP
Webilm julieformal kellystarbuckcom mg 5471

Business is Growing at the ILM Business Park

Julie Wilsey - Wilmington International Airport
Rob20beale2 311791810

The Key to Project Success

Rob Beale - W.M. Jordan Company

Trending News

New Bakeries, Including Breadsmith, Coming To Wilmington

Jessica Maurer - Feb 18, 2019

Chef And Managing Partner Dean Neff Leaving PinPoint Restaurant

Jessica Maurer - Feb 20, 2019

City Council Set To Consider Castle Street Property's Future

Christina Haley O'Neal - Feb 18, 2019

Business Owners, Elected Official Among TEDxAirlie Speaker Lineup

Johanna Cano - Feb 20, 2019

Pita Delite Welcomes Diners At New Landfall Shopping Center Location

Jessica Maurer - Feb 20, 2019

In The Current Issue

Changing Tides

While some might expect the growth spurt in the town of Carolina Beach to cause major growing pains, town officials say the challenges posed...


Navy Week To Coincide With Azalea Festival

The U.S. Navy is coming to the Port City this spring, coinciding with the N.C. Azalea Festival. Wilmington is among the 14 selected sites –...


Tourism Group Names Azalea Festival Top Event

The Southeast Tourism Society recently named the N.C. Azalea Festival one of the group’s Top 20 Events in the Southeast for April this year....

Book On Business

The 2019 WilmingtonBiz: Book on Business is an annual publication showcasing the Wilmington region as a center of business.

Order Your Copy Today!


Galleries

Videos

Health Care Heroes 2018
2018 WilmingtonBiz Expo - Keynote Lunch with Eric Dinenberg, Rouse Properties