Lease accounting

Adopting the new FASB lease accounting standard (ASC 842)

The FASB’s lease accounting standard change, ASU 2016-02, Leases (Topic 842), presents dramatic changes to the balance sheets of lessees. Among many of the changes, lessor accounting is updated to align with certain changes in the lessee model and the new revenue recognition standard.

Read executive level insights into the new lease accounting rules through our In the loop series, and gain a technical perspective into the leasing standard’s requirements with our In depth publication, which includes industry-focused supplements.

A comprehensive accounting and reporting guide on lease accounting to help you with your company’s implementation is also available.

Quick update on what is changing

  • The FASB and IASB each issued new lease guidance in early 2016.
    • The boards differ in their approaches to lessee accounting.
  • Under the FASB's approach, lessees will need to recognize a right-of-use asset and a lease liability for virtually all of their leases. For income statement purposes, the FASB retained a dual approach, requiring leases to be classified as either operating or financing, similar to today. Lessor accounting is similar to the current model.
    • The IASB’s approach presents virtually all leases in a manner similar to today’s financing leases.
    • The boards are more closely aligned on the lessor accounting, which is substantially equivalent to current US GAAP and IFRS.
  • The guidance significantly changes lessee accounting for leases and impacts financial statement presentation and financial metrics, including many that relate to debt covenants, key performance indicators, and perhaps compensation arrangements.
  • The SEC would not object to certain PBEs (i.e., entities that are PBEs solely due to the inclusion of their financial statements or financial information in another entity’s filing with the SEC) adopting the new leases standard using the timeline otherwise afforded private companies. Refer to In brief US2017-22, SEC extends revenue and leases effective dates for certain PBEs, for further details.
  • Early adoption is permitted.
  • Transition: The FASB’s standard is required to be adopted using a modified retrospective transition approach, which requires application of the new guidance at the beginning of the earliest comparative period presented in the year of adoption.
    • Proposed simplified transition: In January 2018, the FASB issued an exposure draft proposing additional amendments (“targeted improvements”) to the new leases guidance. The proposed amendments would allow entities to elect a simplified transition approach, and reduce the need for many lessors to separate lease and non-lease components. Comments were due on February 5, 2018, and the FASB is reviewing comments received. The proposed amendments would have the same effective date as the new leases standard.
  • Land easements: In January 2018, the FASB issued ASU 2018-01, Leases (Topic 842): Land Easement Practical Expedient for Transition to Topic 842. This ASU amended the new leases guidance to add an optional transition practical expedient for land easements that allows an entity to continue applying its current accounting policy for certain land easements that exist or expire before the standard’s effective date. The amendment has the same effective date as the new leases standard.

Featured videos

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Leasing - Accounting for variable lease payments

How should a lessee account for variable lease payments under the new leases guidance? See this video for details. 

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Leasing - Discount rate for the lease liability

Lessees will soon need to recognize lease liabilities for almost all leases. Find out why the discount rate matters in this video.

How an equipment lease management solution can provide benefits beyond compliance

Historically, equipment leases have lacked centralized processes and controls with most companies using manual tracking methods, resulting in limited visibility across the lease portfolio. The new leasing standards pose a particularly difficult challenge for equipment leases, which are often smaller in value but much more numerous and complex than property leases.

Compliance with the new standards will be more challenging without a complete understanding of an organization’s equipment-leasing portfolio. A robust equipment lease management solution not only helps companies comply with the new standards, but can also provide increased transparency and efficiencies across the organization.

Read more

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Lease accounting “In depth” industry supplements

These industry-specific supplements complement PwC’s In depth overview of the new lease accounting standard (ASC 842). They provide examples and further insights into ways entities within the industry are likely to be affected.
 

See all lease accounting industry supplements

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Beth Paul
Strategic Thought Leader, National Professional Services Group, PwC US
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David Schmid
IFRS & US Standard Setting Leader, National Professional Services Group, PwC US
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Sheri Wyatt
Partner, Deals, Accounting Advisory Services, PwC US
Tel: +1 (312) 298 2425
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Chad Kokenge
Partner, PwC Deals, PwC US
Tel: +1 (646) 818 7795
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