The Financial Accounting Standards Board recently issued Accounting Standards Update No. 2016-02. The guidance affects entities, including nonprofits, that lease assets (lessees) and is intended to improve financial reporting of leasing transactions.
Under the guidance, lessees must recognize assets and liabilities for leases with lease terms of more than 12 months. This includes both finance and operating leases. Previously, only capital leases were accounted for on the balance sheet. This update does not apply to nonprofits getting free use of space.
The guidance also requires certain disclosures about the amounts recorded in the financial statements. The new disclosures should provide analysts with a better understanding of a lessee’s financial statements. The update will also minimize the opportunities for lessees to structure lease transactions to achieve a particular outcome on their balance sheets.
For leases of more than 12 months, a lessee will be required to list on its balance sheet as of the beginning of the lease:
- A right-of-use asset, which is the lessee’s right to use, or control the use of, a specifi ed asset for the lease term
- A lease liability, which is the lessee’s responsibility to make lease payments as per the terms of the lease agreement, measured on a discounted basis
For non-public entities, compliance is required for fiscal years beginning after December 15, 2019, and for interim periods within fiscal years beginning after December 15, 2020. A not-for-profit organization that has issued (or is a conduit bond obligor for) securities traded, listed, or quoted on an exchange or an over-the-counter market must follow the guidance for fiscal years beginning after December 15, 2018, and for interim periods within those fiscal years.