At Christianson, we track any and all changes that impact our clients and the way their accounting processes are done. In this case, accounting for leases, which always has been a complex area, is undergoing significant change with the release of new lease standards by the Financial Accounting Standards Board (FASB).
On February 25, 2016, the FASB issued the new standard, Leases (ASC 842). There are elements of the new standard that could impact almost all entities to some extent, although lessees will likely see the most significant changes. A basic premise of the new guidance is that a lease which “conveys the right to control the use of an identified asset for a period of time in exchange for consideration” creates an asset and a liability for lessees that should be reflected on the balance sheet. There is an exception to balance sheet recognition for leases with a term of one year or less (“short-term leases”), or one year with a renewal option if the option is not reasonably certain to be exercised. The lease accounting standard is effective for private companies for fiscal years beginning after Dec. 15, 2019, and interim periods within fiscal years beginning after Dec. 15, 2020. A few items that companies should be considering now:
- Update your lease inventory. Review contractual agreements to determine if they contain a lease arrangement, and thus are subject to the new requirements
- Evaluate the impact of balance sheet changes. Consider any potential impact of changes to the balance sheet on loan covenants and compensation arrangements.
- Review your accounting policy on leases. Implement consistent accounting policies and internal controls related to new classification criteria for the entire population of leases.
Contact our Accounting team at Christianson PLLP for further guidance and consultations as you begin your lease implementation process.