A new accounting standard on leasing will take effect in the United States in 2019 at the same time that companies following international accounting standards will also adopt similar requirements.
The Financial Accounting Standards Board has finalized its deliberations on how to require companies to bring lease obligations into financial statements and plans to issue the final rule in early 2016, a slight delay from its planned fourth-quarter release. The board determined it will be effective for public companies in annual and interim periods beginning after Dec. 15, 2018, while private companies will have an extra year.
The International Accounting Standards Board recently determined its new leasing standard will take effect for companies following International Financial Reporting Standards along the same time line. FASB and IASB worked jointly for several years to develop a new standard for leasing that would bring the financial obligations associated with leased assets on to corporate balance sheets. The boards agreed on how to define a lease and how leased assets and liabilities will be recognized on the balance sheet.
Ultimately, however, the boards settled on different methods for how to reflect lease obligations in the income statement. FASB has settled on a two-lease model similar to the way today’s leases are classified as either capital or operating. FASB’s standard will require companies to amortize leased assets at a slower rate in the earlier years of a lease compared with the IASB approach, where amortization will occur more on a straight-line basis.
“We believe that this new standard is important because it will provide investors, lenders and other users of financial statements a more accurate picture of the long-term financial obligations of the companies to which they provide capital,” said FASB Chairman Russ Golden in a statement.
Given the 2019 effective date for the leasing standard, that will allow companies to adopt the new revenue recognition standard a full year before they would be required to implement the new lease accounting approach. FASB and IASB initially set the revenue recognition effective date at 2017, but delayed it a year as companies reported difficulties meeting the time line.