Lease accounting

The FASB’s new lease accounting standard, ASU 2016-02, Leases (Topic 842), was issued on February 25, 2016. The new leasing standard presents dramatic changes to the balance sheets of lesseesLessor accounting is updated to align with certain changes in the lessee model and the new revenue recognition standard.

Our lease accounting page is your resource for implementing the new leasing guidance. Here you will find helpful information and insights on the new lease accounting rules including executive level insights through our In the loop series, and a deeper dive into the leasing standard’s overall requirements with our In depth publication. Now available: a comprehensive accounting and reporting guide on lease accounting to help you with your company’s implementation. Also available, industry focused In depth supplements. Visit for details on how PwC can assist with your approach to the new standard.


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Leasing - remeasurement, modifications and terminations

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Key developments in lease accounting

  • The FASB issued ASC 842, Leases, on February 25, 2016, and the IASB issued IFRS 16, Leases, on January 13, 2016.
  • Both standards require lessees to reflect virtually all leases on their balance sheet. However, the boards differed in their approach to the lessee income recognition model. The IASB’s approach presents virtually all leases (other than short term leases or “small ticket” leases) in a manner similar to today’s financing leases. Under that approach, the lessee's expense would be front loaded. The FASB retained a dual model that includes financing leases, which are similar to today’s capital leases, and operating leases, with expense recognized on a straight-line basis. Under the FASB's dual approach, determining whether a lease is a finance or operating lease will be based on guidance similar to the classification model under current US GAAP, but without the bright lines.
  • The boards are more closely aligned on the lessor model, which is substantially equivalent to current US GAAP and IFRS. Certain changes were required to conform lessor accounting to the recently issued revenue recognition guidance. However, the boards differ in some areas, such as how to identify when the lessor has sold an asset via the lease arrangement. The IASB’s focus is on the transfer of risks and rewards, which is consistent with the principle in its current guidance. The FASB’s approach is based on control of the asset, which is similar to the model in the new revenue standard. This means a sale can only occur when control of the asset has transferred. If control has not transferred, an arrangement otherwise qualifying as a finance lease would be accounted for as a direct financing lease (i.e., the underlying asset would be derecognized, but upfront profit would not be recognized).
  • The FASB’s standard is effective for public companies, certain not-for-profits, and benefit plans for interim and annual reporting periods beginning after December 15, 2018 (private companies have an additional year). Entities are required to adopt the standard 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. Early adoption is permitted.
  • The IASB’s standard is effective for annual reporting periods beginning on or after January 1, 2019. The IASB permits retrospective or a simplified retrospective transition, which does not require a restatement of comparatives and includes certain reliefs related to the measurement of the right-of-use asset and the lease liability. Early adoption is permitted only concurrent with adoption of the new revenue standard.

Why it's important

  • The current lease accounting guidance has been criticized for allowing leased assets and, perhaps more importantly, the obligations for future lease payments to be excluded from the balance sheet, and for using “bright line” thresholds that can lead to significantly different accounting for economically similar transactions. The project was originally expected to result in a standard that provided generally consistent accounting for leases on a global basis; however, this will not be fully achieved.
  • The guidance significantly changes lessee accounting for leases and impacts financial statement presentation and financial metrics, including many that relate directly to debt covenants, key performance indicators, and perhaps compensation arrangements.
  • Management should begin thinking about how the new rules may affect existing leases as well as considering those potential implications for contemplated new agreements. In addition, they need to communicate with banks, rating agencies, and financial analysts about how the company’s financial picture may be affected.
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IFRS & US Standard Setting Leader, National Professional Services Group

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