Up and Coming New Lease Standard
There is a new accounting standard impacting all companies that lease assets such as office space, vehicles and equipment, and prepare GAAP (generally accepted accounting principles) financial statements.
The new standard is effective for financial statement reporting periods beginning after December 15, 2019 for private companies (after December 15, 2018 for public companies). Companies will be required to apply the guidance to leases greater than twelve months, beginning in the earliest comparative period presented in the year of adoption, which for most private companies will be on their December 31, 2020 financial statements.
The core principal is that companies will now need to recognize all leases as assets and liabilities on their balance sheet. This will be done by recording a liability for future lease payments (the lease liability) and a right-of-use asset representing its right to use the underlying asset for the lease term.
This is similar to how capital leases are recorded under existing GAAP.
Under the new guidance, leases will be categorized using a dual model approach. Leases are categorized into two groups for lessees: 1.) finance (currently, capital leases) and 2.) operating leases. Lessors’ leases are categorized into three groups: 1.) sales-type, 2.) direct financing, and 3.) operating leases. Disclosures to the financial statements will also be modified based on the new guidance.
This new accounting standard, particularly for operating leases, is not compliant with income tax regulations. As a result, this will potentially lead to differences between book and tax reporting.
This article does not include all the implications of the new guidance. Accounting professionals at Rodman CPAs have the knowledge and resources to help companies transition their accounting to adhere to this new standard. While the requirement is still a couple years away, it would be beneficial, especially for companies with a significant number of leases, to begin planning for the implementation process.
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