Operating Leases Now Join Capital Leases on Balance Sheets

Operating Leases Now Join Capital Leases on Balance Sheets

According to the new Financial Accounting Standards Board (FASB) accounting standard release (ASU 2016-02) regarding the treatment of leases, most operating leases will need to be reported as an asset and liability on the balance sheet of businesses and not-for-profits just like its counterpart, capital leases.

In the past, capital leases (i.e. a lease where the intent of the lessee is to own the equipment at the end of the lease term) were reported as a “fixed asset” and a “lease liability” on the company’s balance sheet. Whereas with operating leases (i.e. renting office space or equipment but at the end of the term the property is returned to the lessor), you did not have to report the asset and liability of the operating lease on the balance sheet.  Under the new FASB requirement, most operating leases must now be reported on the balance sheet as a “right-of-use asset” and a “lease liability”.

 

In the pre-FASB 2016-02 Accounting Standard era:

                                                           Balance Sheet                                           Income Statement

Capital Lease                     Fixed Asset / Lease Liability                       Amortization expense / Interest Expense

Operating Lease              **Assets/Liabilities not reported               Single lease expense

 

Under the new FASB 2016-02 era:

                                                           Balance Sheet                                           Income Statement

Capital Lease                    Right-of-Use Asset / Lease Liability            Amortization expense / Interest Expense

Operating Lease             **Right-of-Use Asset / Lease Liability         Single lease expense

                                                        

The effective date of the transition to ASU 2016-02 is calendar year 2019 for public companies and calendar year 2020 for non-public companies.

The new FASB will have its largest impact on the company’s debt ratios which could affect debt financing and debt loan covenant testing.

If you have any further questions on how your company will transition to the new accounting requirements under ASU 2016-02, please contact our office at 410-792-7259.

Source:  FASB Accounting Standards Update 2016-02

 

 

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The Cultural Alliance of Greater Washington has worked with Bormel, Grice & Huyett, P.A., since 1988. Their knowledge of the arts and the arts community make their services invaluable. They can translate accounting terminology into a comprehensive language. For many organizations, the accounting firm of Bormel, Grice & Huyett provides the financial "information bridge." We whole-heartedly recommend Bormel, Grice & Huyett, excellent accountants who care about our arts organizations.
Jennifer Cover Payne, Executive Director, Cultural Alliance of Greater Washington

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