Lease Accounting Standards Update

ASC 842 impacts all entities that lease property, plant or equipment and report under GAAP

On February 25, 2016, the Financial Accounting Standards Board (FASB) issued an Accounting Standards Update, ASU 2016-02, Leases (ASC 842). For non-public entities, ASC 842 is effective for fiscal years beginning after December 15, 2021.

ASC 842 impacts all entities that lease property, plant or equipment and report under accounting principles generally accepted in the United States of America (GAAP). Under ASC 842, companies must record a right of use asset and a lease liability on the balance sheet for most leasing arrangements. ASC 842 will impact companies’ financial statements and could also impact companies’ debt covenants.

Under the old accounting standards, operating lease obligations (for example, a lease of office space for 10 years) are disclosed in a company’s financial statement footnotes, but not recorded on the balance sheet. Under the new guidance, a lessee will be required to recognize assets and liabilities for leases with lease terms of more than 12 months. ASC 842 requires both types of leases (finance leases and operating leases) to be recognized on the balance sheet.

Lessors’ accounting for leases is substantially unchanged under ASC 842.

KRS professionals are available and happy to assist with any questions or the implementation of the new ASC 842 standards. Visit the KRS Assurance Services page for expanded details. Please contact us if you have any questions or need further assistance.