FASB Amends Operating Lease Regulations

August 2018 | Article

With the implementation of ASU 2016-02, “Leases,” looming on the horizon, FASB recently issued ASU 2018-11 to respond to criticisms of unnecessary cost or complexity in the original standard.

The new ASU focuses on two areas:

  • Comparative reporting at adoption.
  • Practical expedient to lessors for separating components of a contract.

Comparative Reporting
The original ASU required retroactive application to all periods presented.   Under the new optional transition method of ASU 2018-11, an entity can apply the new standard at the adoption date and recognize a cumulative-effect adjustment to opening retained earnings in the period of adoption. Comparative periods presented in the financial statements, under this new standard, continue to be reported in accordance with current accounting principles. There is no change to related disclosure requirements.

Separating Components
The original ASU required lessors to separate non-lease components when applying the new ASU standard. Under the new transition method, lessors can adopt the practical expedient to account for all lease components as a single component if (1) the timing and pattern of transfer of the non-lease components are the same as the lease components, and (2)the lease component would be classified as an operating lease if accounted for separately. Additional disclosures are required if adopting the new ASU. For entities that have already early-adopted ASU 2016-02, the practical expedient may be elected in either the first reporting period following issuance of this ASU or at the original effective date for the entity. In addition, the practical expedient may be applied either retrospectively or prospectively. Note that a similar practical expedient for lessees was included in ASU 2016-02 as issued.

As a reminder, ASU 2016-02 is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years, for nonprofits that have issued or are conduit bond obligors for securities that are traded, listed, or quoted on an exchange or an over-the-counter market. For all other nonprofits, the new standard is effective for fiscal years beginning after December 15, 2019, and interim periods within fiscal years beginning after December 15, 2020. Early application is permitted for all entities.

Application of these new standards may be complicated depending on the complexity of the lease terms. Please contact any member of your Eide Bailly service team to discuss your specific circumstances and how these new standards will apply to your nonprofit organization.

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