The Financial Accounting Standards Board (FASB) has finally issued the new lease accounting standard. The new standard is effective for non-public companies for the 2020 financial statements, allowing plenty of time to adapt.
The final version is closer to the current accounting than the previous drafts.
The recognition, measurement, and presentation of expenses and cash flows arising from a lease by a lessee have not significantly changed from previous Generally Accepted Accounting Principles (GAAP). There continues to be a differentiation between finance leases and operating leases. However, the principal difference from previous guidance is that the lease assets and lease liabilities arising from operating leases should be recognized in the statement of financial position.
For finance leases, a lessee is required to do the following:
- Recognize a right-of-use asset and a lease liability, initially measured at the present value of the lease payments, in the statement of financial position
- Recognize interest on the lease liability separately from amortization of the right-of-use asset in the statement of comprehensive income
- Classify repayments of the principal portion of the lease liability within financing activities and payments of interest on the lease liability and variable lease payments within operating activities in the statement of cash flows.
For operating leases, a lessee is required to do the following:
- Recognize a right-of-use asset and a lease liability, initially measured at the present value of the lease payments, in the statement of financial position
- Recognize a single lease cost, calculated so that the cost of the lease is allocated over the lease term on a generally straight-line basis
- Classify all cash payments within operating activities in the statement of cash flows.