Lease Accounting Standard Impact

In February 2016, the Financial Accounting Standards Board (FASB) issued an Accounting Standard Update (ASU 2016-02 or the ASU) to amend the accounting guidance for leases. On Nov. 15, 2019, the FASB announced a delay in the effective date of the ASU for non-public business entities, who are now required to apply ASU 2016-02 for reporting periods beginning after Dec. 15, 2020.

Under ASU 2016-02, a company will be required to recognize most leases with terms greater than 12 months on its balance sheet. Specifically, lessees are required to recognize at lease commencement, both:

  • A right-of-use (ROU) asset: representing the lessee’s right to use the underlying asset over the term of the lease.
  • A lease liability: representing the lessee’s contractual obligation to make lease payments over the term of the lease.

This presentation under ASU 2016-02 represents a change for arrangements previously treated as operating leases, which were historically presented as period expenses on the income statement. The FASB believes balance sheet presentation of leases will provide a clearer view of a company’s future commitments by ensuring rights and obligations associated with operating leases are reflected on the balance sheet instead of relegated to the financial statement footnotes.

Under ASU 2016-02, leases recorded on the balance sheet will be classified as either financing leases or operating leases, which will determine the presentation of the related income statement impact. Financing lease arrangements will result in depreciation and interest expense recorded each reporting period, while operating lease assets and liabilities will be amortized and accreted to present value each year and presented as lease expense on the income statement.

Government contractors, particularly those with significant operating lease activity under current lease accounting guidance, can take advantage of the delayed effective date of ASU 2016-02 to prepare for implementation.