The Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2016-02, Leases (Topic 842), on February 25, 2016. It is expected to be effective for periods beginning after December 15, 2018 for public entities, and for periods beginning after December 15, 2019 for nonpublic entities. Early application is permitted.
Under the new provisions, all lessees will report a right-of-use asset and a liability for the obligation to make payments for all leases with the exception of those leases with a term of 12 months or less. All other leases will fall into one of two categories:
- Financing leases, similar to capital leases, will require the recognition of an asset and liability, measured at the present value of the lease payments.
- Interest on the liability will be recognized separately from amortization of the asset.
- Principal repayments will be classified as financing outflows and payments of interest as operating outflows on the statement of cash flows.
- Operating leases will also require the recognition of an asset and liability measured at the present value of the lease payments.
- A single lease cost, consisting of interest on the obligation and amortization of the asset, calculated such that the amortization of the asset will increase as the interest amount decreases resulting in a straight-line recognition of lease expense.
- All cash outflows will be classified as operating on the statement of cash flows.
Lessor accounting remains substantially unchanged with the exception that no leases entered into after the effective date will be classified as leveraged leases.
For sale leaseback transactions, the sale will only be recognized if the criteria in the new revenue recognition standard are met.
- If there is no sale, the buyer-lessor does not recognize the transaction as a purchase.
- Consideration paid for the asset is treated as a financing transaction.
Why is the FASB issuing this Accounting Standards Update?
The FASB is issuing this Update to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. To meet that objective, the FASB is amending the FASB Accounting Standards Codification® and creating Topic 842, Leases. This Update, along with IFRS 16, Leases, are the results of the FASB’s and the International Accounting Standards Board’s (IASB’s) efforts to meet that objective and improve financial reporting.
When is ASU 2016-02 – Topic 842, Leases, eligible to be tested on the CPA Exam?
ASU 2016-02 – Topic 842, Leases, could be tested on the CPA Exam by January 2019. Check back often to receive the most up-to-date information on CPA Exam changes.