In 2016, the FASB issued ASC 842 updating the accounting treatment of leases. The goal of the update was to provide more transparency and comparability among companies regarding lease assets and liabilities. To help ease the transition, the Board has allowed entities time to adopt the new leases standard.
As we get closer to Q4 2018, the adoption date of January 1, 2019 for calendar year-end public entities is quickly approaching. Not only must these companies adopt the standard, but they also must recognize the cumulative-effect adjustment on the balance sheet.
But companies aren’t the only ones affected by this change.
If you’re preparing to take the FAR section of the CPA Exam, then these changes affect you as well. Keep reading for some highlights of the updated standard.
Balance Sheet Recognition
- Operating leases over 12 months will now be reported on the balance sheet.
- The new standard creates transparency for investors regarding a company’s financial leverage and earnings.
Financial Statement Disclosures
- ASC 842 has more stringent requirements for quantitative and qualitative financial statement disclosures.
- The increased requirements may require companies to improve or implement new systems, procedures and controls to provide the required disclosures.
Lease Qualification
- Long-term leases are now reported on the balance sheet.
- Short-term leases (terms of 12 months or less) are still allowed to be excluded from the balance sheet.
- The new standard dictates that if the lessee does not have the right to control the use of the asset, then the transaction may not qualify as a lease.
Lease Payments
- Revised definition of indirect costs resulting in fewer allowed capitalized costs.
- Executory costs, like property taxes or insurance, will now be included in lease payments.
Sale-Leaseback Transactions
- To qualify as a sale, the transfer of the asset must adhere to the revenue recognition requirements in ASC 606 (Revenue from Contracts with Customers)
- When the transaction does not qualify as a sale, it is classified as a financing transaction
- New guidance regarding when the lessee controls the asset before the lease starts results in fewer built-to-suit arrangements that qualify as a sale-leaseback
Sit for FAR before January 1, 2019
There’s still time to study for and pass the FAR Exam before the changes go into effect on January 1, 2019.
If you need help working the FAR Exam into your busy schedule, our new SmartPath Predictive Technology™ is the most effective way to maximize your study time—helping you pass the CPA Exam faster than ever before. It’s a data-driven platform that tells you exactly where and how to focus your efforts , taking the guesswork out of CPA Exam preparation.
As a Roger CPA Review student, your study materials will automatically be updated to prepare you in time for the January 2019 changes. So, no matter when you decide to take the FAR exam, we’ve got you covered and will guide you on the smart path to CPA Exam success.