The Financial Accounting Standards Board has finalized an enormous simplification of the pending new lease accounting standard, permitting companies to forego historic presentations.
The board issued in final form Accounting Standards Update No. 2018-11 to say companies can apply Accounting Standards Codification Topic 842 on lease accounting on a prospective or go-forward basis instead of applying it to the earliest comparative period presented in financial statements. The standard takes effect Jan. 1, 2019, for calendar-year public companies. Private companies will be required to comply a year later.
The new simplification means companies are not required to restate two prior years in financial statements as if the new lease accounting standard had been in effect all along. The new ASU also provides a practical expedient specific to lessors, sparing them the burden of separating lease components from non-lease components in certain contracts if they meet certain conditions. The board earlier approved more than a dozen smaller technical improvements to the rule.
“The targeted improvements in the ASU address areas our stakeholders identified as sources of unnecessary cost or complexity in the leases standard,” said Russell Golden, FASB chairman, in a statement. “They represent FASB’s commitment to proactively address implementation issues raised by our stakeholders to ensure a successful transition to the new standard without compromising the quality of information provided to investors.”
Companies have reported difficulty getting their arms around their lease obligations, especially with respect to lease elements contained in service contracts that have not historically been treated as leases for accounting purposes. Companies have also told FASB they are having trouble getting software updates and system upgrades in place in time to comply with the new accounting. Delays have also been attributed to the considerable effort undertaken last year to adopt new rules on revenue recognition. The practical expedient will leave historic periods presented under current accounting requirements, which means leases will remain in footnote disclosures in earlier periods.
The new standard on lease accounting brings virtually all leases out of footnotes and into the body of financial statements, which is expected to gross up corporate balance sheets with new assets and liabilities measured in trillions of dollars. The heightened prominence of lease obligations is intended to give investors a better understand of a company’s true financial position, and the exercise of bringing the accounting onto balance sheets is bringing new rigor to the inventorying and management of leases, not to mention the accounting.