Does your company currently operate as a lessee under one or more leases? If so, your company’s financial statements may be affected by the impending changes made official by the Financial Accounting Standards Board (FASB) this past February.
Prior to implementation of the new standards, leased assets meeting the capital lease criteria required leased asset capitalization and a corresponding leased liability. Operating leases did not require asset capitalization and liability recognition, and all rental activity was expensed on the income statement.
Those criteria that existed to create the capital lease treatment were the following (only one had to be satisfied to be considered a capital lease):
- Existence of a bargain purchase option for the leased asset.
- Transfer of ownership of the leased asset to the lessee at the conclusion of the original lease term.
- The lease term is equal to at least 75% of the useful life of the leased asset.
- The present value of the minimum lease payments is equal to at least 90% of the fair value of the leased asset.
Under the new standards, most leases will require a right of use asset to be capitalized along with a leased liability on the balance sheet regardless if the lease meets the above criteria or not. Companies may elect out of the new treatment for leases of 12 months or fewer. If the election is made, the lease will be treated as an operating lease under the previous standards.
The new standards come into effect for public companies with fiscal years beginning after December 15, 2018, and for private companies with fiscal years beginning after December 15, 2019.