In this blog we take a deep dive into leases and the changes that are coming. Two types of leases currently exist under generally accepted accounting principles for both the FASB (Financial Accounting Standards Board) and the GASB (Government Accounting Standards Board) – operating leases and capital leases. An operating lease is essentially renting where the payments are considered operational expenses and the asset being leased is not reported on the balance sheet. This type of lease can be typically seen with office equipment or rental space. In contrast, a capital lease is treated as a loan where the asset is reported on the balance sheet and payments are recorded against the outstanding “loan” balance until full ownership of the asset is complete. This type of lease can typically be seen with vehicles and heavy equipment.
New changes will now require all leased items to be treated in a manner consistent with accounting for capital leases. Both FASB and GASB have taken the stance that leases that were previously reported as operating leases actually convey the “right to use” an underlying asset for a period, therefore, that use should be reported as an asset on the books and amortized for the proper useful period. These changes were made in an effort to increase transparency and disclosure surrounding what was previously considered to be “off-balance sheet financing.”
New standards are effective for all entities for fiscal years starting after December 15, 2019, except for public business entities which will be effective for fiscal years starting after December 15, 2018.
These links will provide more disclosure and detail regarding these new standards:
For business, non-profits, and other entities:
In order to prepare for these new lease standards, we recommend all clients take an inventory of all leases, gather all important documents in a file (especially those that outline the current lease terms), and assess each current lease as operating or capital under the current standards. The new standards will require a retrospective implementation so having all information available at audit time will help with the adoption of this new guidance. Please feel free to reach out to our office with questions!