Operating leases, while subject to footnote disclosures outlining the future commitments, remained off the balance sheet. Under previous GAAP, only capital leases were recognized on the balance sheet. That is, rent expense will continue to be incurred for operating leases, and finance leases will continue to be recognized as depreciation and interest on the income statement, with changes in the principal portion of the finance lease liability being classified within financing activities on the cash flow statement.
The accounting for capital leases is largely unchanged from previous generally accepted accounting principles (GAAP), with the exception that capital leases have been renamed “finance leases.” Additionally, lease accounting on income statements and statements of cash flows is largely unchanged from previous GAAP. Brief Overview of ASC 842 What Hasn’t Changed? Thus, the recognition of new assets and liabilities on corporate balance sheets requires a reorientation of valuation models. While ASC 842 may provide investors and other financial statement users with new information, and may enhance the comparability between similar businesses, the adoption of any new accounting standard should not create or destroy value.
Now effective for most public companies (and for all public companies by the end of 2019), the new lease rules are expected to add more than $2 trillion of assets and liabilities to corporate balance sheets. What is debt or debt-like? Is asset ownership binary? The Financial Accounting Standards Board (FASB) weighed in with the adoption of Accounting Standards Codification (ASC) Topic 842 – Leases (ASC 842) in 2016. This article was featured in the AIRA Journal.
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