Financial Accounting Standards Board (FASB) Accounting Standards Update (ASU) 2016-02 Leases (Topic 842) is a new standard that will govern the accounting for lease contracts beginning with the 2019 calendar year-end for public companies and the 2020 calendar year-end for all other entities1. To affect these changes, this ASU, along with several subsequently issued ASUs, amends the existing FASB Accounting Standards Codification (ASC) and creates a new Topic 842, Leases.
Lease assets and liabilities will be recorded on the balance sheet
The key difference between existing standards and FASB ASC Topic 842 is the requirement for lessees to recognize on their balance sheet all lease contracts with lease terms greater than 12 months, including operating leases. Specifically, lessees are required to recognize on the balance sheet at lease commencement, both:
- A right-of-use (ROU) asset, representing the lessee’s right to use the leased asset over the term of the lease; and,
- A lease liability, representing the lessee’s contractual obligation to make lease payments over the term of the lease.
The new lease standard requires lessees to classify leases as either operating or finance leases, which are similar to the current operating and capital lease classifications. However, the distinction between these two classifications under the new standard does not relate to balance sheet treatment, but relates to treatment and recognition in the statements of income and cash flows.
Lessor accounting is largely unchanged from current accounting principles generally accepted in the United States (U.S. GAAP), with the exception of some revisions made to ensure consistency with the revised lessee guidance of FASB ASC Topic 842 and with FASB ASC Topic 606, Revenue from Contracts with Customers.