By Stephen G. Austin, CPA; Joel C. Colbourn; and Kristen Gibbons | Originally posted on: www.journalofaccountancy.com
FASB’s new lease accounting standard is having a significant effect on a broad range of balance sheets for all types of entities, with some companies reporting financial obligations of billions of dollars.
In addition to requiring large sums to be placed on balance sheets, the new standard is causing difficulties for preparers as they struggle to locate and extract data from their many lease contracts so they can comply with the new rules. But this is not the only difficulty preparers are facing.
Under the new standard as codified in FASB ASC Topic 842, Leases, contracts that are not clearly identified or labeled as leases may be “arrangements that contain a lease.” For example, a lease may exist when equipment is provided by a vendor in connection with the purchase of consumables or the delivery of a service. Discovery and deeper evaluation of these arrangements where leases may be hidden in plain sight has been a significant challenge for many preparers.
FASB’s previous lease accounting standard, Topic 840, also required evaluation of these arrangements, although some may say that this analysis was not considered as thoroughly as it is now that the lease liability belongs on the balance sheet under Topic 842. Often under Topic 840, the many “service contracts” that met the “arrangements that contain a lease” criteria were classified as some type of operating expense other than rent expense.
The correction of this accounting is probably a classification issue in the income and expense statement.… Read More