The New Leasing Standard Is Delayed, But the Time to Prepare is Now
In early 2016, the FASB issued ASU 2016-02, Leases (ASC 842). The new leasing standard was effective January 1, 2019 for public companies. Although the FASB recently deferred the effective date of the new standard for private companies to 2021, that date will be here before you know it, and there is much to be done, both to prepare for adoption and to operationalize the provisions going forward.
The most significant impact of the new standard is the balance sheet recognition of assets representing the right to use leased assets, plus related liabilities representing obligations to make future lease payments. Under previous GAAP, lessees recognized capital leases on the balance and disclosed operating leases as off-balance sheet arrangements. The new standard requires a lessee to recognize right-of-use (ROU) assets and related lease liabilities on the balance sheet for virtually all leases regardless of classification.
Many businesses opt to lease office locations and/or rent various systems or operating equipment, including those in the technology and life sciences industries. As a result, leasing is a significant activity for such companies, and the adoption of the new leasing standard will likely result in a significant change to their balance sheets.
Although the initial recognition of lease assets and liabilities will result in a significant change to the balance sheet, the new standard is not expected to significantly impact the income statement recognition of lease expense. However, that doesn’t mean that subsequent accounting under the new standard will be simple. Some of the complexities associated with applying the new leasing guidance on an on-going basis are:
- Reassessment events – When should an existing ROU asset and lease liability be reassessed and remeasured? Lease renewals and other modifications, as well as changes or updates to the underlying leased asset, may result in the need to remeasure the ROU assets and lease liabilities.
- Impairment events – With leases now recognized on the balance sheet, asset groups contain additional assets (ROU assets) that must be assessed for impairment. As a result, the recognition of ROU assets and lease liabilities can add substantial complexity to the related impairment assessments.
For a more in-depth discussion of the new leasing standard and the varying impacts to your business, please reach out to a member of our Technical Accounting Advisory Team.
Material discussed in this communication is meant to provide general information and should not be acted on without obtaining professional advice tailored to you or your company’s individual and specific needs. Any tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used by any person or entity, for the purpose of (i) avoiding penalties that may be imposed on any taxpayer or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein. This information is for general guidance only and is not a substitute for professional advice.
The information contained herein should not be construed as personalized investment advice. Investment in securities involves the risk of loss, and past performance is no guarantee of future results. There is no guarantee that the views and opinions expressed in this document will come to pass. Historical performance results for investment indexes and/or categories generally do not reflect the deduction of transaction and/or custodial charges or the deduction of an investment-management fee, the incurrence of which would have the effect of decreasing historical performance results. There can be no assurances that your portfolio will match or outperform any particular benchmark.
Information presented was obtained from sources deemed qualified and reliable; however, MFA makes no representations as to accuracy, completeness, suitability, or validity of any information within this communication and will not be liable for any errors, omissions, or delays in this information or any losses, injuries, or damages arising from its display or use. Any forward-looking statements are believed to be reasonable; however, MFA gives no assurance that such expectations will prove to be correct.