The Financial Accounting Standards Board (FASB) initiated a joint project with the International Accounting Standards Board (IASB) in 2006 for the purpose of revising lease accounting standards. After their decade-long efforts, both Boards finalized their respective lease accounting standards in early 2016. The new standards fundamentally change the rules that govern accounting for substantially all leases, including equipment and real estate leases. We expect the standard will have far-reaching implications in areas such as accounting, finance and reporting, real estate, tax, and technology among others.
How ready are you for FASB’s new lease accounting standards?
Current US Generally Accepted Accounting Principles (GAAP) as prescribed by Accounting Standards Codification (ASC 840) focuses on whether the lease transfers substantially all of the risks and rewards of ownership. The new guidance, codified as ASC Topic 842, Leases, introduces a right-of-use model, which shifts from the risks and rewards approach to a control-based approach.
Initial steps to plan for the road ahead may include:
- Understand the accounting requirements
- Understand the lease population (e.g., by type, system, and location)
- Assess capabilities of existing technology
- Perform a lease data gap analysis
- Develop an implementation roadmap that includes all impacted areas
What is the effective date?
The FASB’s Accounting Standards Update, ASU 2016-02, Leases, was issued on February 25, 2016. The new guidance is effective as follows:
- For public business entities, the standard is effective for annual periods beginning after December 15, 2018 (i.e., calendar periods beginning after January 1, 2019), and interim therein.
- For all other entities, the standard is effective for annual periods beginning after December 15, 2019 (i.e., calendar periods beginning after January 1, 2020), and interim periods after December 15, 2020.
- Early adoption would be permitted for all entities.
The IASB’s standard, IFRS 16, is effective for annual periods beginning on or after January 1, 2019. Early adoption is permitted, though an entity is not allowed to adopt the leases standard any earlier than it adopts IFRS 15, Revenue from Contracts with Customers.
What are some of the expected impacts?
The Leasing model will likely require operational and system changes potentially impacting many areas in the organization, including accounting, finance, financial reporting, taxes, and technology among others.
Operational considerations include:
- Challenges in data collection and aggregation across multiple locations and technology platforms
- Technology capabilities to store lease data and perform calculations, including calculations during the lookback period (comparative prior periods)
- Review of lease tax classification and other factors; any changes in classification require IRS consent
- Enhanced disclosure requirements
- Financial ratios may change with potential impacts to debt covenants or other guarantees
- Impact of limited resources and ongoing business needs on timeline for adoption
- Transforming from paper documents to sustainable technology solutions
Join Deloitte for a 90-minute Dbriefs webcast at 2:00 pm Eastern on Tuesday, March 15, 2016. You can expect to learn about the FASB’s new lease accounting guidance and the associated implementation challenges, including:
- How to evaluate whether a contract is, or contains, a lease.
- The lessee and lessor models and other key provisions of the new standard.
- The new standard’s effective date and transition provisions.
- Important implementation considerations.
Register now.