By Brett Steffen – GreatAmerica has been getting more questions lately from office technology dealers about the status of the new lease accounting standard. As you may know, in February 2016, the Financial Accounting Standards Board (the “FASB”) issued a new lease accounting standard (Topic 842).
The new lease accounting standard will impact financial reporting for entities that are required to report their financial results in accordance with U.S. generally accepted accounting principles. Topic 842 does not impact the tax treatment of leases. In addition, Topic 842 will not impact the many economic benefits realized by utilizing leasing as a source of financing. Leasing is still a great financing option for your customers!
Topic 842 is effective for public companies for fiscal years beginning after December 15, 2018, and is effective for private companies one year later. Early adoption is permitted for all entities. Upon adoption, companies will be required to recognize and measure leases at the beginning of the earliest period presented in their financial statements. Although the new standard will be applied to all active leases at the time of transition, lessees may not be required to reassess lease classification upon transition.
The FASB did retain a dual lease classification model. In other words, the new lease accounting standard maintains the concept of a finance lease (formerly a capital lease), and an operating lease. There were minor changes made to the lease classification criteria, primarily to remove the “bright lines” that exist in the current standard. A summary of the changes to the lease classification criteria can be found here.