Impact of Financial Accounting Standards Board (FASB) Accounting Standards Update ASU 2016-02 Leases

Impact of Financial Accounting Standards Board (FASB) Accounting Standards Update ASU 2016-02 Leases

Expert Solution

The update is the recognition of a right to use asset and lease liability on the financial statement for the leases which are previously identified as operating lease under the old one.

It have two main classification of lease

1.Financial Lease

2.Operating lease

The criteria to determine such classification is essentially the same but it is more subjective.The leasee would classify the lease as finance lease of the following conditions are met.

The lease transfers the ownership of the underlying asset to the leasee by end of the lease term
The lease grants the leasee an option to purchase the underlying asset the leasee is reasonable to exercise.
The lease term for the major part of the remaining economic life of the underlying asset.
The PV of sum of lease payments and residual value guarnteed by the leasee equals or exceeds the substantial all of the fair value of the underlying asset
The underlying asset is of such specilaised nature that there is no expected alternative use to the leasor at the end of the term.

The update is effective for fiscal years beginning after Dec 15 ,2018 for any of the following

a Public business entity
A not for profit seeking entity that have issued securities that are traded,listed or quoted on an exchange or an over the counter market.
An Employee benefit plan with the US securities and Exchange commission.

ekkarill92 answered 2 years ago

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