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In the News: 3 Steps to Understanding Lease Materiality

The issue of materiality in the new lease accounting standard can be challenging, but LeaseCrunch, the only lease accounting software made by former CPA firm auditors for CPA firm auditors, says there are three key steps to understanding the issue.

“Now that operating leases must be captured on financial statements under the new lease standard, many CPAs are wondering about materiality,” said Ane Ohm, CEO of LeaseCrunch.  “For the international standard, IFRS 16, the materiality threshold is set at $5,000, meaning that leases under that amount do not need to be accounted for on the books.

“However, FASB did not set a similar threshold for materiality under the U.S. standard, ASC 842, so many organizations are wondering how to determine what operating leases are material enough that they should be added onto their balance sheets.

“As with many aspects of the new lease standard, materiality is an area that requires judgment—though there are important considerations that can help.”

Consideration #1: Alignment with your fixed asset schedule 

When capturing a lease on your financial statements, you record the right-of-use (ROU) asset on your balance sheet with your other long-term assets. For this reason, many organizations choose to align their lease materiality thresholds with their fixed asset materiality policies.

In other words, if a purchased asset is less than the dollar amount determined to be immaterial to the overall financial statements, the full value of that asset is expensed upon purchase. Similarly, if an ROU asset is less than that same dollar amount, the lease payments are all expensed and the ROU asset is not reflected on the balance sheet. 

You can read the full article from CPA Practice Advisor, here.