Leases 101: New Accounting Standard ASC 842 (Part 2)
In prior sessions we saw three examples that helped us identify a lease, which did not look as such on the surface.
Now, there is more to lease accounting than what you saw so far. Let’s learn more about how entities, especially lessees, have been affected by the new accounting standard.
Balance Sheet Gross-Up
The single most important change driven by ASC 842 is the balance sheet gross-up for lessees.
Lessees should record on the balance sheets the liabilities and right-of-use assets (i.e. leased assets) for operating leases. High level, liabilities are determined by discounting future lease payments.
As a refresher, an operating lease is a type of lease that does not meet any of the 5 criteria established to define capital leases.
In the past, operating leases were accounted for by debiting the income statement and crediting balance sheet liability to the extent the liabilities were due to the lessor.
Under the new standard, lessees account for operating leases similar to how capital/finance leases are accounted for.
Triple Net Leases
Under the new accounting standards certain payments such as insurance, maintenance and property taxes will be treated differently from how they were treated before. Specifically, insurance and property taxes will be part of lease payments. Maintenance is considered a service separate from the lease and is accounted for as such- not part of the lease.
New disclosure requirements- Lessees
ASC 842 introduced new disclosure requirements. Lessees should disclose for every reporting period presented and separately for operating and finance leases:
- weighted-average discount rate;
- weighted-average remaining lease term;
To determine the weighted-average discount rate, a lessee will have to take all its lease contracts, discount rate and remaining undiscounted lease payments for each. It should then calculate the average discount rate by weighting each by remaining undiscounted lease payments. Similar process is used to determine weighted-average remaining lease term.
Similar to the old standard, lessees disclose future lease payments- separately for each of the first 5 years and then in total through the end of the lease term. This disclosure is presented separately for operating and finance leases. Lessees should also show a reconciliation of the future lease payments to lease liabilities as reported on the balance sheet.
The new lease standard applies to public companies beginning with annual periods that start after December 15, 2013 and interim periods that start with the same annual year. Private companies have one more year before they have to apply ASC 842.
Overall, the new standard applies retrospectively- from the beginning of the earliest period shown in the financial statements.
Stay tuned for more accounting updates!