Automated classification of short term leases and small value lease exemptions, along with FASB operational and finance lease classifications. This article includes a summary of the high points of the new standard from a lessee approach; however, each company has a unique set of circumstances to be considered.
IFRS 16 requires that the lease liability should initially be measured at the present value of the lease payments that are not paid at the commencement date. The discount rate used to determine present value should be the rate of interest implicit in the lease.
However, some of the accounting treatment for lessors and lessees under the new lease standards did change. Even though a capital lease is technically a sort of rental agreement, GAAP accounting standards view it as a purchase of assets if certain criteria are met. Capital leases can have an impact on companies’ financial statements, influencing interest expense, depreciation expense, assets, and liabilities. The benefit of transparency comes at a cost for lessees, especially those with operating leases. Lessees must begin complying with the new standards by taking an inventory of all their operating leases, which can be a major administrative undertaking.
The ASC 842, GASB 87, and IFRS 16 standards became effective for public companies since the beginning of fiscal year 2019, but also included the demand to report on its regulations over the financial years starting in 2017. During the transition period between 2017 and 2019, the reporting requirements as defined by ASC 840 and IAS17 are still effective, so a twofold lease calculation and reporting is required, without a double payment and accounting. When the lease agreement is classified lease accounting as a finance lease, the lessor will calculate the net investment in the lease using the present value of future expected lease receipts and record this amount as a receivable. Lessors are also required to derecognize the carrying value of the underlying asset. Any difference between the net investment in the lease and the carrying value of the underlying asset is recognized as a gain or loss on the income statement. The accounting for the lessor is largely unchanged from ASC 840 to ASC 842.
Examples of practical limitations are assets that have unique design specifications or that are in remote areas. Fill in the form to learn more about our software solutions and services for workplace management, lease administration and lease accounting.
This content is for educational and informational purposes only and does not represent the views and opinions of Avantax Wealth ManagementSM or its subsidiaries. Avantax Wealth ManagementSM is not responsible for and does not control, adopt, or endorse any content contained on any third-party websites. The new standard requires a significant number of additional qualitative and quantitative lease disclosures.
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