Page 22 —
COLORADO REAL ESTATE JOURNAL
— May 4-May 17, 2016
Law & Accounting
O
n Feb. 25, 2016, the
Financial Account-
ing Standards Board
issued its long-awaited standard
requiring lessees to recognize all
leases with terms greater than 12
months on their balance sheet as
lease liabilitieswitha correspond-
ing right-of-use asset. Account-
ing Standards Update 2016-02,
Leases (Topic 842), maintains the
dual model for lease accounting,
requiring leases to be classified as
either operating or finance, with
lease classification determined in
a manner similar to existing lease
guidance.
The ASU’s basic principle is
that leases of all types convey the
right to direct the use and obtain
substantially all the economic
benefits of an identified asset,
meaning they create an asset and
liability for lessees. Lessees will
classify leases as either finance
leases (comparable to current
capital leases) or operating leases
(comparable to current operating
leases). Expenses will be reported
on the income statement substan-
tially as they are today – costs
for a finance lease will be split
between amortization and inter-
est expense, with a single lease
expense reported for operating
leases.
n
Lessee accounting.
Under
the ASU, lessees should recog-
nize in their statement of finan-
cial position a liability to make
lease payments (the lease liabil-
ity) and an ROU asset represent-
ing their right to use the under-
lying asset for the lease term.
Today’s capital leases and new
leases that are determined to be
effectively installment purchases
by the lessee will be classified
as finance leases, while current
operating leases will retain their
classification.
Lessees will maintain substan-
tially the same expense recogni-
tion patterns for operating leases
and finance leases (existing capi-
tal leases) as under the existing
lease standard. Changes come in
terms of the balance sheet and
ongoing lease administration.
A lessee will recognize the
value of the asset created by the
lease as an ROU asset and a cor-
responding lease liability for the
minimum lease payments, dis-
counted at the rate implicit in the
lease (if the rate isn’t known, the
lessee’s incremental borrowing
rate will be used).
Whenmeasuring assets and lia-
bilities arising from a lease, a les-
see (and a lessor) should include
p a y m e n t s
to be made
in optional
periods only
if the lessee
is
reason-
ably certain it
will exercise
an option to
extend
the
lease or will
not exercise
an option to
terminate the
lease. Option-
al payments
to purchase
the underlying asset should be
included in a similar manner. A
lessee (and a lessor) will exclude
most variable-lease payments in
measuring lease assets and lease
liabilities, other than those that
depend on an index or a rate or
are, in substance, fixed payments.
n
Lessor accounting.
Les-
sor accounting is substantially
unchanged. However, the ASU
contains some targeted improve-
ments intended to align les-
sor accounting with the lessee
accounting model and with the
updated revenue recognition
guidance issued in 2014 under
Topic 606. Lessors will deter-
mine lease classification based on
whether the lease is effectively a
financing or a sale, rather than
an operating lease – the concept
underlying existing generally
accepted accounting principles.
Lessors will continue to reflect
the underlying asset subject to
the lease arrangement on the bal-
ance sheet for leases classified
as operating; they also will con-
tinue to recognize lease income,
generally on a straight-line basis
over the lease term. For financ-
ing arrangements (direct finance
or sales-type leases), the balance
sheet will reflect a net investment
in the lease, representing the sum
of the lease receivable and the
unguaranteed residual asset. For
direct financing leases, the net
investment is reduced by any
deferred selling profit.
n
Disclosures.
The ASU
requires both qualitative and
specific quantitative disclosures
to help investors and other finan-
cial statement users better under-
stand the amount, timing and
uncertainty of cash flows arising
from leasing activities.
n
Effective date.
The new
guidance is effective for public
business entities for fiscal years
beginning after Dec. 15, 2018,
including interim periods within
those fiscal years,
i.e.,
Jan. 1, 2019,
for a calendar-year entity. Non-
public business entities should
apply the new guidance for fis-
cal years beginning after Dec.
15, 2019, i.e., Jan. 1, 2020, for a
calendar-year entity, and interim
periods within fiscal years begin-
ning after Dec. 15, 2020. Early
adoption is permitted for all enti-
ties.
n
Transition.
The ASU allows
companies to apply the lease
guidance at a portfolio level and
elect transition reliefs (termed
“practical expedients”); it also
provides guidance to help entities
meet implementation require-
ments. Transition reliefs include
the ability to:
• Forgo the requirement to
reviewexisting contracts for lease
arrangements and evaluate lease
classification for existing leases.
• Forgo the need to identify
initial direct costs for leases that
commenced before the effective
date.
• Use hindsight in evaluating
lessee options to extend or ter-
minate a lease or purchase the
underlying asset.
Companies are required to
use a modified retrospective
approach for leases that exist or
are entered into after the begin-
ning of the earliest comparative
period in the financial state-
ments. Full retrospective applica-
tion is not permitted.
The update includes specific
transition guidance for sale and
leaseback transactions, build-to-
suit leases, leveraged leases and
amounts previously recognized
in accordance with the busi-
ness combinations guidance for
leases.
s
Connie Spinelli,
CPA, CMA, CISA
Director, National
Accounting and
Auditing, BKD LLP,
Denver
The ASU’s basic
principle is that
leases of all types
convey the right to
direct the use and
obtain substantially
all the economic
benefits of an
identified asset,
meaning they create
an asset and liability
for lessees.
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