New Lease Standard – What You Need to Know
What to Know
Companies that report leases on their financial statements will need to be prepared for some changes coming from a new accounting standard update that will affect how leases are calculated and how they will be reported on the financial statements. This new standard will be effective for reporting periods ending on or after December 15, 2022.
The Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2016-02 (Topic 842), relating to Leases. This ASU is effective for reporting periods ending on or after December 15, 2022 and will have an impact on how companies report leases on their financial statements. The ASU will change the way we reference “capital” lease, these will now be called “finance” leases. The ASU will require all leases, operating and finance (capital), with a lease term of more than one year to be brought onto the balance sheet. All operating leases will now show on the balance sheet as an asset with an offset liability, and these balances will be equal to the total amount of lease payments to be made over the term of the lease.
The amount that is recognized as a lease payment is going to change as follows, the definition of indirect costs is expected to change, all executory costs (property taxes, insurance etc.) will not be included in the lease payment, and any fixed cost or costs that are part of an index will be included in the lease payment.
The criteria for whether a contract contains a lease will change as well. Companies will need to ask the following questions: (1) Does the customer control the use of the identified asset through the period of use? (2) Is there an identifiable asset? (3) Does the customer have the right to use all the benefits of the asset being leased? and (4) Does the customer have the right to direct the use of the asset? If ALL these questions are answered yes, then the contract does contain a lease.
What to Do Now
Do you have leases currently? Are some of these leases for terms greater than one year? If you are unsure if this will affect you and your business, we recommend reaching out to your accountant.
If this new standard will affect you, now is the time to start reviewing all lease agreements that you have. We recommend summarizing all leases that you hold, determine the lease term to help identify which leases will be affected. Gather all relevant lease documents and signed agreements; this information will be needed to determine if the contract is a lease and what amounts will be included in the calculation of total lease payments. It may also be beneficial to prepare an analysis for all leases using the four questions noted above, this will help jump start the conversation around how leases previously report under the old standard will be reported under the new lease standard.
How We Can Help
Melanson is here to help you prepare for the reporting requirements under the new lease standard. Melanson has invested in a software that is designed to help determine under what category each lease should be recognized and designed to help calculate the amount that will need to be recognized as an asset and offsetting liability, by entering some information from the lease documents and signed agreements. The software is meant to help increase efficiency and accuracy around the calculations required by the new standard.
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