Is Your Private Company on Track To Meet the 2022 Deadline for the Updated Lease Standard?
Updated accounting rules for long-term leases took effect in 2019 for public companies. And, after several deferrals by the Financial Accounting Standards Board (FASB), starting in fiscal year 2022, private companies and private not-for-profit entities must follow suit. The updated lease standard guidance requires these organizations, for the first time, to report the full magnitude of their long-term lease obligations on the balance sheet. Here are the details.
In 2019, the FASB deferred Accounting Standards Update (ASU) No. 2016-02, Leases (Topic 842), to 2021 for private entities. Due to the COVID-19 pandemic, the FASB granted another extension in 2020 to the effective date of the updated leases standard for private firms.
Currently, the lease standard changes for private entities will apply to annual reporting periods beginning after December 15, 2021, and to interim periods within fiscal years beginning after December 15, 2022. Early adoption is also permitted.
Most private organizations have welcomed these postponements. Implementing the necessary changes to your organization’s accounting practices and systems can be time-consuming and costly, depending on its size and the nature and volume of its leasing arrangements.
The accounting rules that currently apply to private entities require them to record lease obligations on their balance sheets only if the arrangements are considered financing transactions. Few arrangements are recorded because accounting rules give lessees leeway to arrange the agreements in a way that they can be treated as simple rentals for financial reporting purposes. If an obligation isn’t recorded on a balance sheet, it makes a business look like it is less leveraged than it really is.
The updated guidance calls for major changes to current accounting practices for leases with terms of a year or longer. ASU 2016-02 requires lessees to recognize on their balance sheets the assets and liabilities associated with all long-term rentals of machines, equipment, vehicles, and real estate. The updated guidance also requires additional disclosures about the amount, timing, and uncertainty of cash flows related to leases.
Most existing arrangements that currently are reported as leases will continue to be reported as leases under the updated guidance. The new definition is also expected to encompass many more types of arrangements that aren’t reported as leases under current practice. Some of these arrangements may not be readily apparent, such as if they’re embedded in service contracts or contracts with third-party manufacturers.
Organizations shouldn’t wait until year-end to apply the updated guidance for long-term leases. Many public companies found that the implementation process took significantly more time and effort than they initially expected.
If you have questions about the new lead standard rules, contact us to discuss your specific situation.
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