The Journal Record - Jake Winkler
Jul 14, 2021
The Financial Accounting Standards Board and the Governmental Accounting Standards Board are changing the way that companies and governments record operating leases.
The Financial Accounting Standards Board and the Governmental Accounting Standards Board are changing the way that companies and governments record operating leases. As of publication of this article, the new lease standards are effective for entities under GASB for fiscal year ends beginning after June 15, 2021, and for entities under FASB for fiscal year ends beginning after Dec. 15, 2021. The applicable FASB standard is ASU 2016-02 while the applicable GASB standard is GASB Statement 87. While the accounting for leases varies somewhat between FASB and GASB, the overall definition and tracking is relatively similar. The standards will require retrospective application.
Under the new standard, a lease is a contract (or part of a contract) that, in exchange for consideration, conveys the right to control the use of identified property, plant or equipment (an identified asset) for a period of time. A customer has the right to control the use of an identified asset when both of the following exist throughout the period of use:
• The right to obtain substantially all of the economic benefits from the asset’s use.
• The right to direct the use of the asset.
The most difficult part of this new standard is identifying the existing leases based on this new definition. The safest approach is to review any periodic payments that your entity makes to determine if they meet the revised definition. However, you should know that there are items that are scoped out of the standard, like:
• Leases of biological assets, such as timber, living plants and animals.
• Leases based on future performance.
• Leases of intangible assets, including natural resources and software.
Disclosures surrounding leases are also changing. There will be expanded disclosures regarding the terms and assumptions used to estimate lease obligations. The standard also does not let you out of recording leases if they are a one-year term. Part of the disclosure considerations is to evaluate renewal and termination options and that those considerations are included in the remaining economic life if there is a reasonable expectation that the options will be exercised by the company.
The most effective way to track leases under the new standard is to use software that will aid you in the application. You should check with your current general ledger software company to see if they have any add-ons to the existing package that will incorporate the new lease standards into your current system. Tracking them in Excel is not a good option as there is too much risk for user error in the calculation process.
These are suggestions for the preparation of the new lease standard as you begin your process for accumulating data for the recording of the leases. After gathering this information, you should be ready to begin the calculation of the related assets and liabilities and then determining what will be booked each period to accurately record lease activity.
Jake Winkler, CPA, is a partner at Arledge, an Edmond-based public accounting firm.