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New Lease Accounting Standards Change Real Estate Landscape. Are You Prepared?

In August 2010 the Financial Accounting Standards Board (FASB) and International Accounting Standards Board (IASB) released an Exposure Draft outlining sweeping changes to how leases are accounted for and reported. The proposed changes were poised to significantly impact your company’s balance sheet and fundamentally change leasing strategies and practices.

On May 16, 2013, as a result of numerous comment letters and industry pressure, FASB issued a revised Exposure Draft (“ED”), which, if it becomes effective, will still significantly change the accounting treatment for many leases.

Leases would be required to be classified as either Type “A” or Type “B.”

  • Type “A” leases generally apply to something other than real property, such as tangible personal property like vehicles, machinery, aircrafts, and other equipment.
  • Type “B” leases are generally for real property or a portion thereof.
  • Short-term leases for a period of 12 months or less are not affected by the new proposed rules.

LESSEE ACCOUNTING

Type A Leases (Financing Approach):

  • Right of Use (ROU) asset and Lease Liability recorded on the Balance Sheet measured at present value of lease payments
  • Amortization and Interest Expense on the Income Statement

Type B Leases (Straight Line Approach):

  • Right of Use (ROU) asset and Lease Liability recorded on the Balance Sheet measured at present value of lease payments
  • Lease Expense recorded on a straight line basis in the Income Statement

LESSOR ACCOUNTING

Type A Leases (Receivable and Residual Approach):

  • Derecognize part of underlying asset and record a Lease Receivable and a Residual Asset on the Balance Sheet
  • Income Statement will reflect profit on the derecognized asset and interest income on the Lease Receivable

Type B Leases (Straight Line Approach):

  • Underlying asset will remain on the Balance Sheet
  • Lease Income recorded on a straight line basis in the Income Statement

ADDITIONAL GUIDANCE

  • Renewal options included as part of ROU and Lease Liability when lessee has “significant economic incentive” to exercise
  • Fixed, CPI and index-based increases in rents are included
  • Usage or performance-based obligations (i.e., percent of sales or machine hours) are not included

Other Applications

The following applications are designed to work hand-in-hand with FASB Administration:

"FASB Administration" is part of the AMTdirect line of products, developed by AMTdirect.