Big Changes in Lease Accounting: FASB Releases Final Standards

The Financial Accounting Standards Board (the “FASB”) released the long-anticipated final standards, Leases (Topic 842) (the “Final Standards” or “Topic 842”), on February 25, 2016, completing an overhaul of the lease accounting standards that was more than ten years in the making in the U.S. The most significant change in lease accounting brought about by the Final Standards is that all leases will now appear on the balance sheet of generally accepted accounting principles (“GAAP”) reporting entities. These changes bring an end to the decades-long treatment of accounting for the obligations of lessees under operating leases as operating expenses reflected on income statements rather than as liabilities, with corresponding assets, reflected on balance sheets. As a result, all leases are now viewed as creating an asset and a liability to be recognized on the balance sheets of lessees and lessors.

The FASB commenced the project in 2006 to overhaul lease accounting standards with the twin objectives of providing greater transparency for material lease obligations that are not recognized on balance sheets and converging its lease accounting standards with the lease accounting standards of the International Accounting Standards Board (“IASB”) in order to provide consistent reporting of leases across multiple reporting jurisdictions. While the FASB achieved the first goal, it was unsuccessful in achieving the second. In 2014, the two boards agreed to de-link their projects over their disagreement as to whether accounting by lessees should be based on a one-lease model or two-lease model, which distinguishes between capital leases and operating leases. This divergence resulted in the issuance by IASB on January 13, 2016 of International Financial Reporting Standard 16 (“IFRS 16”) and the issuance by the FASB of the Final Standards.

This OnPoint will provide historical background on the financial accounting standards for leases, and an overview of the prior treatment of leases and of the future treatment of leases under the Final Standards. This OnPoint will conclude with an assessment of the likely effects of the Final Standards on leasing generally.

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