The Financial Accounting Standards Board says it is getting lots of technical questions on how to apply the new leasing standard, so the board took the unusual step of offering some informal, high-level feedback and is planning to say something more formally before the end of 2016.
The new leasing standard, issued by FASB earlier this year, takes effect in 2019, the year after companies are to adopt new accounting requirements for revenue recognition. While the leasing standard is not as huge in terms of the technical accounting change, it brings virtually all leases on to corporate balance sheets, which will produce big change in the financial metrics for many companies.
FASB says it is getting technical questions in five specific areas of the new leasing standard: how to define a lease; how lessees, or those who lease property, should apply the standard; how lessors, or entities that lease out property, should apply the standard to their side of transactions; how the discount rate works; and how to transition to the new standard. The bulk of the questions focus on lessee accounting and transition, FASB says, probably because the standard is focused on lessee accounting, and transition is one of the first issues companies have to navigate to adopt the standard.
FASB says it is studying the lease implementation process and plans to hold some kind of public discussion or dialogue on key issues and next steps before the end of the year. In the meantine, the board says it has not heard any questions so far that suggest any formal standard-setting is warranted.
For now, FASB is offering three observations on the lease accounting standard:
First, FASB says, companies need to consider whether a contract has been accounted for as a lease under existing GAAP. “Addressing this question is a good starting point because most contracts that are accounted for as leases today will continue to be accounted for as leases under the new guidance,” FASB says.
Second, lessors should take note that little has changed in the requirements for them, but there are some subtle changes to assure the new guidance is consistent with the new revenue recognition principles. “For example, stakeholders should consider whether the new standards may change their current accounting for lease receivables,” FASB notes.
Finally, “because lessees will now be recognizing operating leases on the balance sheet, those lessees should spend additional time understanding the guidance for lease and non-lease components and the discount rate,” FASB advises.
FASB says it still does not believe it needs to form a Transition Resource Group like that reviewing questions on revenue recognition or credit impairments, but it will continue to monitor implementation and invites further technical questions.