The updated lease accounting standard is currently in effect for private companies, including many financial institutions. After postponing several times during the pandemic, the Financial Accounting Standards Board (FASB) voted unanimously to move forward with the changes. That means companies that follow U.S. Generally Accepted Accounting Principles (GAAP) must adopt the new standard for the following:
- Fiscal years beginning after December 15, 2021
- Interim periods within fiscal years beginning after December 15, 2022
Some organizations still haven’t completed the implementation process.
In A Nutshell
Organizations are required to report operating and finance leases on their balance sheets. This excludes short-term leases with terms of 12 months or less. Previously, operating leases didn’t have to be recorded on the balance sheet.
Lessees must now record a ‘right-to-use’ asset and a corresponding liability for lease payments over the expected term. The asset and liability are based on the present value of minimum payments expected to be made under the lease, with certain adjustments. Additional disclosures about the amount, timing, and uncertainty of cash flows related to leases are also required.
How will these changes affect your organization’s financial statements? The effects vary. If you have significant operating leases for buildings, equipment, vehicles, technology, and other assets, adopting the updated standard will immediately increase your company’s assets and liabilities. In addition, lease expense will be replaced with interest expense and depreciation.
A Major Undertaking
The biggest challenge you will likely experience will be locating all your leases and extract the data necessary. Leases generally aren’t standardized, so reviewing them and gathering the required data can be a time-consuming task.
Another challenge will be identifying leasing arrangements that are not found in traditional lease agreements. If an agreement gives you the right to control an identified asset for a period of time in exchange for payment, then it may be considered a lease. Leases may be ‘embedded’ in service, supply, or information technology agreements. With embedded leases, you’ll need to separate the contract’s lease and nonlease components for reporting purposes.
Leverage External Resources
Does your financial institution have significant leasing arrangements? If you haven’t yet started the implementation process, we can help. Contact us for more information.