Question

Summarize the impact of ASU 2016-02, Leases on the recording of leases.

Answer 1

The Financial Accounting Standards Board (FASB) introduced a new accounting standard (ASU 2016-02) that requires companies to recognize operating lease assets and liabilities on the balance sheet.My forensic accounting technology has applied this convention since inception, so all of my models and research already reflect and will continue to reflect this change.

HISTORY

A company can lease assets in one of two ways:

Capital leases

Operating leases.

Capital leases effectively act as debt to own the underlying asset leased. A simple analogy is taking out a loan to purchase a car or home; payments are made periodically and, at the end of the term, the asset is owned outright with the loan repaid.

Operating leases do not transfer ownership of the underlying asset, and payments are made for usage of the asset. A simple analogy here is leasing a car from a dealer; the lessee makes payments for the right to use the car, but does not gain equity in the car itself and will not own the car at the end of the lease.