Understanding the New Lease Accounting Guidance

AuthorLeonard J. Sliwoski
Date01 May 2017
Published date01 May 2017
DOIhttp://doi.org/10.1002/jcaf.22273
48
© 2017 Wiley Periodicals, Inc.
Published online in Wiley Online Library (wileyonlinelibrary.com).
DOI 10.1002/jcaf.22273
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Understanding the New Lease
Accounting Guidance
Leonard J. Sliwoski
INTRODUCTION
In early 2016, the
Financial Account-
ing Standards Board
(FASB) issued
Accounting Stan-
dards Update (ASU)
No. 2016-02, Leases.1
The purpose of this
article is to review the
new lease accounting
guidance and com-
pare this guidance to pre-ASU
lease accounting guidance.
PRE-ASU LEASE ACCOUNTING
GUIDANCE
Prior to the ASU, from the
lessee’s perspective, leases were
categorized as either capital or
operating. From the lessor’s
perspective, leases were catego-
rized as either operating, direct-
financing, or sales-type leases.
With capital leases, at lease
inception, the lessee recognized
a leased asset and a related lia-
bility and the lessor recognized
a lease receivable (for both
direct-financing and sales-type
leases) and reduced inventory.
This accounting was based on
the assumption that an asset
was purchased by the lessee
and was sold by the lessor and
financed on an installment
basis. With operating leases, at
lease inception, the lessee did
not recognize an asset or liabil-
ity, and the lessor continued to
recognize the leased asset. This
accounting was based on the
assumption that no lessee asset
purchase, or lessor asset sale,
occurred.
From the lessee’s perspec-
tive, a lease was considered to
be a capital lease if the lease
transferred risks and rewards
of leased asset ownership from
the lessor to the lessee. Specifi-
cally, a capital lease was a non-
cancelable lease that met one or
more of the follow-
ing four quantitative
criteria:
1. The lease agree-
ment specied
that ownership of
the leased asset
transfered to the
lessee.
2. The lease agree-
ment contained a
bargain purchase
option.
3. The noncancelable lease
term was equal to 75% or
more of the expected eco-
nomic life of the leased
asset.
4. The present value of the
minimum lease payments
was equal to or greater than
90% of the fair value of the
leased asset.
Lessees usually preferred
to have leases classified as
operating leases. Without rec-
ognizing a leased asset and
liability at lease inception, the
lessee’s debt-to-equity ratio was
lower, return-on-assets ratio
was higher, and net income
was higher in early lease years.2
The article discusses the new lease accounting
rules in ASU 2016–02. Specifically, the article
discusses how implementation of these rules
prohibits lessees from using leases to obtain
off-balance sheet financing. The article contrasts
ASU 2016–02 lease accounting and previous
lease accounting rules, and provides a numerical
lease example illustrating both previous and new
lease accounting rules. © 2017 Wiley Periodicals, Inc.
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