Throughout this past year, there has been talk of the new accounting standard for leases, ASU 2016-2, Leases (Topic 842), and how it affects manufacturers and distributors. It should be noted that in July of this year, the Financial Accounting Standards Board (FASB) initiated a delay in the implementation date. Now that it has been delayed another year, there will be even more time to talk about it.
This delay, which was requested by the AICPA’s Technical Issues Committee, provides manufacturers with an extra year to become familiar with the accounting standard. The accounting standard for leases was originally effective for non-public companies with fiscal years beginning after December 15, 2019. As a result of the delayed implementation, the standard is now effective for non-public companies with fiscal years beginning after December 15, 2020 (2021 for calendar year-end companies).
The standard was delayed for a number of reasons, including:
- Public companies struggled to adopt and comply with the standard when it was first released
- The timing of expected adoption for this standard aligned closely with the new revenue recognition standard implementation date
- Private companies are required to adopt the new revenue recognition standard currently in 2019
Defining the Standard Change
Leasing is a crucial source of financing used by manufacturing companies to acquire equipment or facility expansions while avoiding a large initial cash investment. Whether a manufacturer has one lease or many, the leasing standard can impact a company’s financial statements prepared in accordance with Generally Accepted Accounting Principles (GAAP).
To recap the upcoming changes: the new lease standard does not eliminate the need to classify leases as either a finance lease (formerly referred to as a capital lease) or an operating lease. The lease classification requirements to determine which class of lease the contract falls under does remain relatively unchanged. With that said, if the lease is determined to meet the requirements of a finance lease, then it is accounted for under the new lease standard as it is under the current standard. If it meets the requirements to classify as an operating lease, on the other hand, the asset is classified on the balance sheet (similar to a capital lease), resulting in different recognition of expense over the lease term, with interest expense and depreciation of the asset.
For More Information
Our team is diligently working with our clients to understand and prepare for the implementation of the new leasing standards, as well as the new revenue recognition standard. With the deferred effective date of the leasing standard in place, we encourage company owners and leaders in the industry to use this time to proactively address the implementation of this standard. Please contact us with questions or for help evaluating and adopting the leasing standard. You can also check out this insight for more details on what the accounting standard means for your business.