Whether you are a small startup organization just getting off the ground or are well-established with years under your belt, chances are you have leased a piece of equipment, office space or property. These leases have been treated as either operating or capital leases on your books. All that is about to change.
On February 25, 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2016-02, Leases (Topic 842). The ASU on leases will take effect for public companies for fiscal years beginning after December 15, 2018 (calendar year 2019) and for all other organizations, including not-for-profit organizations, for fiscal years beginning after December 15, 2019 (calendar year 2020).
A few of the improvements that the FASB is seeking through the new lease standards are:
• More faithful representation of a lessee’s rights and obligations arising from leases
• Fewer opportunities for organizations to structure leasing transactions to achieve a particular outcome on the balance sheet
• Improvements in the understanding and comparability of a lessee’s financial statements
• Additional information about lessors’ leasing activities and exposure to credit and asset risk as a result of leasing
There are many key requirements to the standard that will need to be addressed, but the biggest changes for your organization are as follows:
• If you are the lessee, you will recognize most leases on your balances sheet (statement of financial position for not-for-profit organizations). If your lease term is greater than 12 months you will be recording both a right of use (ROU) asset and a lease liability. This differs from current treatment of operating leases as currently you are expensing your lease cost on a monthly basis, thus only effecting your “bottom line” and not assets or liabilities.
• There will be expanded quantitative and qualitative disclosures by both lessees and lessors.
• Organizations will need to review each lease and other arrangements to determine if still meet the criteria under the new definition.
Beyond financial reporting, the standard impacts other aspects of operations:
• Moving operating leases onto the organization’s balance sheet could make a significant difference in the numbers the organization is reporting (to creditors, board members, etc.), affecting loan covenants for example.
• Larger organizations with multiple leases may need to spend additional time and resources to identify all leases and gather the data needed to apply the new standard.
We encourage you to start the process early, meet with your management, board, lenders, donors, other users of your financial statements and your accountant to discuss the standard and the impact on your organization.
About the Author: Danielle D. Martin, CPA is a Senior Audit Manager at Perry, Fitts Boulette & Fitton CPAs with 24 years of experience in the accounting world. She can be reached at firstname.lastname@example.org or 873-1603.