FASB Issues New Lease Accounting Guidance

On February 25, 2016, the Financial Accounting Standards Board (FASB) finally issued Accounting Standards Update (ASU) 2016-02, Leases. This long-awaited guidance, which had been under development for almost ten years, incorporates feedback on two exposure drafts from 2010 and 2013, and is listed as Topic 842 within the Accounting Standards Codification (ASC). The FASB issued ASC 842 in response to a growing need by stakeholders for transparency into previously off-balance sheet leasing obligations, which are estimated to be over $1.25 trillion in aggregate. The guidance supersedes ASC 840 – Leases. ASC 842 is not fully convergent with International Accounting Standard (IAS) 17 – Leases.

 

The most material difference between the new ASC 842 and current practice is the gross-up of an entity’s balance sheet to recognize an asset and liability for operating leases. ASC 842 defines leases as either Finance or Operating, as opposed to Capital or Operating under ASC 840. As stakeholder feedback mainly focused on lessee accounting, lessor accounting has remained largely unchanged.

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