If your organization leases just about anything and follows Generally Accepted Accounting Principles (GAAP) in the United States or International Financial Reporting Standards (IFRS) elsewhere, then the new lease standard affects you.
If you’re affected, then you need to know certain key dates, starting with the date by when you have to adopt the new standard.
Important note: This is a judgment-based standard, which means there are few hard-and-fast rules and the treatment of your leases will depend on your unique situation. It's important that you always double-check decisions with an accounting professional who knows your circumstances. This blog should not be considered or take the place of professional advice or services.
We’re excited this month to share insights from our recent conversation with industry expert John Hepp. John is a retired partner from Grant Thornton and a former FASB project manager. He holds a PhD from the University of Wisconsin-Madison and is currently on the faculty at University of Illinois at Urbana-Champaign.
John discussed several nuances of the new lease accounting standard, from practical expedients (“the spoonful of sugar to help the medicine go down”) to discount rates and much more.
Identifying lease and nonlease components
Not all costs related to a lease are included in the leased asset and liability. For example, a lessor may lease a truck and also include a provision to operate the truck on behalf of the lessee. Providing a driver, maintenance and gas are not related to securing the use of the truck and these costs would be considered nonlease components. Another example of a nonlease component is the fee for common area maintenance when renting office space.
Not all arrangements qualify as a lease under the new standard. Of course, sometimes it’s easy to figure out if it’s a lease: renting your office space definitely qualifies as a lease. Copier and vehicle leases are, in fact, leases.
The new lease standard is coming and preparation is critical for a smooth implementation. This is easier said than done and the experts agree: this new standard is complicated.
The new U.S. lease standard, ASC 842, is required for public companies starting their fiscal year after December 15, 2018 and all other companies starting their fiscal year after December 15, 2019. Internationally, the cousin of ASC 842 is IFRS 16, which is effective for annual periods beginning on or after January 1, 2019.