Page 3 - eBook-Real-estate-leases
P. 3
BACKGROUND
In February 2016, the Financial Accounting Standards The primary purpose of the standard is to address
Board (FASB) issued Accounting Standards Update the current accounting treatment of operating leases
(ASU) 2016-02 (“ASC 842”), Leases, which provides new which are deemed to be off balance sheet financing
guidelines that change the accounting for leasing arrangements and are only disclosed via a company’s
arrangements. The new leasing standard becomes financial footnotes in the “Commitments and
effective in fiscal years beginning after December 15, 2018, Contingencies” footnote. Upon the adoption of ASC 842,
including interim periods within those fiscal years, for: Therefore, for every identified lease, companies will be
required to create a lease liability calculated as the present
› Public business entities value of the future fixed payments and a corresponding
› Not-for-profit entities that have issued (or are a con- asset (“right of use” asset). The right of use asset will be
duit bond obligator for) securities that are traded, list- amortized over the life of the lease. The income statement
ed, or quoted on an exchange or an over-the-counter will be impacted by a straight-line lease expense item that
market would essentially contain an interest component with
› Employee benefit plans that file financial statements the amortization of the asset being the plug-in order to
with the US Securities and Exchange Commission achieve straight line lease expense over the life of the
(SEC) lease. One of the key challenges of adopting the new
standard will be for companies to assess and apply the
For all other entities, it becomes effective in fiscal years incremental borrowing rate applicable to them which
beginning after December 15, 2019, and interim periods will be used in the present value calculations for the
in fiscal years beginning after December 15, 2020. Early capitalization of lease liability and right of use assets
adoption is permitted at any time for all entities. related to leases.
3 Copyright © 2018 Bramasol Inc. www.bramasol.com
