Get The Impact On Corporate Real Estate Of Lease Accounting Changes ...

For income statement purposes, ASC 842 retains a dual model requiring leases to be classified as either operating or finance. Operating leases will result in straight-line rental expense similar to current operating leases. Finance leases will result in interest expense determined under the effective interest method.

How does the new lease accounting standard impact my income statement? Under ASC 842, the impact on a lessee's income statement generally will be minimal. The way a lessee accounts for rent expense under the new standard is generally the same as before — straight-line over the term of the lease.

The new standard affects the reporting for operating leases of 12 or more months. An operating lease is an agreement to use and operate an asset without the transfer of ownership. Companies must now recognize a Right of Use “ROU” asset and a corresponding liability for those leases on their balance sheet.

The new standards specifically require that operating leases of 12 months or more must be reflected on the balance sheet as both assets and liabilities—even if the lessee's intent is to return the asset to the owner or landlord.

The new accounting rules don't affect how leases are treated for federal income tax purposes. Tax law will continue to treat a lease as either: A true tax lease. These arrangements are what would have been considered an operating lease under earlier GAAP.

ASC 842 does not really change how leases are treated from a federal income tax perspective. It does, however, make accounting for leases somewhat more challenging when calculating the difference between tax and book income.

The new lease standard is expected to have the biggest impact on those companies with a large volume of real estate leases that have previously only been required to be disclosed in the footnotes to the financial statements.

ASC 842 is the end result of years of effort by the Financial Accounting Standards Board (FASB) to streamline accounting and reporting standards for leases. The most significant change to financial statements is the requirement that all leases be recorded on the balance sheet.