In late February, the Financial Accounting Standards Board issued an Accounting Standards Update relating to leasing transaction reporting, which affects any business that leases assets. The ASU on leases will take effect for public companies for fiscal years, and interim periods within those fiscal years, beginning after Dec. 15, 2018. For nonpublic companies, the ASU on leases will take effect for fiscal years beginning after Dec. 15, 2019, and interim periods within fiscal years beginning after Dec. 15, 2020. For non-public, calendar year-end organizations, adoption will be Jan. 1, 2020, with retroactive application to previously issued annual financial statements for 2018 and 2019. All organizations can proceed with early adoption.
According to the update, the liabilities and assets for the rights and obligations created by leases with terms of more than 12 months must be recognized on the balance sheet. While the Generally Accepted Accounting Principles of recognition, measurement and presentation of expenses and cash flows from a lease still depend on the classification as a finance or operating lease, the new rules require both types of leases be recognized on the balance sheet. Additional qualitative and quantitative informational disclosures are also now required so investors and users of financial statements have a better comprehension of the amount, timing and uncertainty of cash flows from the leases.
Accounting practices for those businesses that own the leased assets will remain unchanged for the most part. The update does include improvements to align lessor accounting with the lessee accounting model and the 2014 revenue recognition guidance.
According to FASB Chair Russell Golden the new reporting requirements “ends what the U.S. Securities and Exchange Commission and other stakeholders have identified as one of the largest forms of off-balance sheet accounting, while requiring more disclosures related to leasing transactions.”
What Do The Accounting Standards Updates Mean for IT
For many businesses, the impact of this change will modify the way assets are recorded. It is anticipated that many more organizations will shift IT purchases from a leasing (operating expenditures) model to a capital investment model since both expenditures will now need to be reported in the year they occur. With this shift in mind, many businesses are opting to move toward a pay-as-you-go, consumption, model through the cloud. This system provides businesses a renewed focus on the strategic work rather than the infrastructure along with realized reduced costs and enhanced performance with real-time updates.
We would welcome the opportunity to assist you in determining if a transition to cloud services would benefit your company. Let us know how we can help.
This article is for information purposes only and should not replace the advice of your accountant or financial team and should not be taken as legal or financial advice.