Question

FASB has develop new accounting standards for accounting for leases. These new standards are not covered in your text book. Research the new FASB Lease Accounting Standards and answer the following questions:

1. Why did FASB develop new lease accounting standards?

2. How will accounting for leases change under these new standards?

3. When will the new standards take effect?

4. How will the changes effect companies who lease assets/

5. Based on your reading and research do you think companies are prepared for these changes?

Submit a paper containing your answers and observations concerning these questions and suggestions you would make to companies who are preparing to implement the new standards.

Answer 1

Ans 1

.Financial Accounting Standard Board (FASB) has developed new lease accounting standards to improve financial reporting about leasing transactions. The new leases standard will increase transparency and comparability among organizations that lease buildings, equipment, and other assets by recognizing the assets and liabilities that arise from lease transactions.

In other words, current off-balance sheet leasing activities will be required to be reflected on balance sheets so that investors and other users of financial statements can more readily and accurately understand the rights and obligations associated with these transactions.

Ans 2.

The FASB lessee accounting model retains two types of leases, and is consistent with the lessee accounting model under existing GAAP.

One type of lease (finance leases) will be accounted for in substantially the same manner as capital leases are accounted for under existing GAAP.
The other type of lease (operating leases) will be accounted for (both in the income statement and statement of cash flows) in a manner consistent with operating leases under existing GAAP. However, as it relates to the balance sheet, lessees will recognize lease liabilities based upon the present value of remaining lease payments and corresponding lease assets for operating leases with limited exception.
Under the new guidance, a lessee will be required to recognize assets and liabilities for leases with lease terms of more than 12 months. Consistent with current Generally Accepted Accounting Principles (GAAP), the recognition, measurement, and presentation of expenses and cash flows arising from a lease by a lessee primarily will depend on its classification as a finance or operating lease. However, unlike current GAAP—which requires only capital leases to be recognized on the balance sheet—the new lease standard will require both types of leases to be recognized on the balance sheet.

The new lease standard also will require disclosures to help investors and other financial statement users better understand the amount, timing, and uncertainty of cash flows arising from leases. These disclosures include qualitative and quantitative requirements, providing additional information about the amounts recorded in the financial statements. So that users can understand more about the nature of an organization’s leasing activities.

Ans 3.

The new leases standard will take effect for public companies and certain other entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. That is, for a calendar year-end public company, the effective date is January 1, 2019. For most other entities, the new standard on leases will take effect for fiscal years beginning after December 15, 2019, and for interim periods within fiscal years beginning after December 15, 2020. Early application is permitted for all organizations.

Ans 4.

Need to Keep Track of Every Asset

Unless they have capital leases, most organizations record leases as rent expenses on income statements and in financial disclosures. The new standards will require them to list all lease assets as liabilities on their balance sheets.

Need to Know Detailed Information About Each Lease

Organizations also will need to distinguish between service contracts and operating leases and keep track of the terms of the lease, as they are required to recognize leases with terms of more than 12 months.

The CEO Will Have Greater Accountability

The new regulations require lease information to be reported on quarterly financial statements. Although the CEO is ultimately held accountable for the accuracy of this information, the responsibilities almost certainly will trickle down to those who report to him or her. That may include the real estate director, analyst, controller or accountant

Tax

Be sure that any new lease accounting system also addresses taxes. The new assets recognized for operating leases will change companies’ book/tax difference computations and could affect certain state and local tax apportionment calculations and transfer pricing.

Ans 5.

In many respects, the final standard can be thought of as moving operating lease obligations from the footnotes to the balance sheet; basically a change in display. Based on substantial outreach with financial statement preparers, the FASB expects that most lessees will be able to meet those reporting and disclosure requirements by leveraging existing systems and processes.

In leveraging existing systems, organizations will need to make sure financial reporting personnel are educated regarding the application of the new standard as there are changes in the details.

While initial implementation activities will require some level of effort for lessees, the ongoing costs of providing the information are expected to be consistent with the costs of complying with existing GAAP.

That’s because, under existing GAAP, organizations are similarly required to:

·         Identify leases

·         Evaluate each lease to determine the applicable accounting model to apply (capital or operating), and

·         Subsequently account for each lease, including meeting the ongoing disclosure requirements about cash flows from leases.

The new standard will not substantially change this level of effort.

As a part of transition planning, organizations may want to form a transition team that includes individuals from departments other than accounting and external reporting.

For example, with the addition of leases to the balance sheet, organizations should review existing contractual agreements, such as lending covenants, to seamlessly adjust to the new standard. Accordingly, it may be wise to include treasury, legal departments, and others as part of a transition team.

Finally, but perhaps most importantly, organizations will want to explain the effects of the changes in accounting for leases on the organization’s financial statements to boards of directors, investors, and other users of financial statements.