Lease Accounting

Both US GAAP and IFRS substantially changed how leases are accounted for, and the new standard will affect all companies that lease assets such as real estate, manufacturing equipment, and vehicles.  The effective date of the new standard under the US GAAP is period beginning after December 15, 2018 for public business entities (and period beginning after December 15, 2019 for all other entities).  An early adoption is permitted.  The effective date under the IFRS is period beginning on or after January 1, 2019.  An early adoption is also permitted.

US subsidiaries of foreign companies issuing financial statement under IFRS MUST implement the new standard concurrently with their parent companies.  Accordingly, the local management should coordinate with the parent companies regarding the implementation process and timing.  Entities are required to adopt the new standard using a modified retrospective transition approach, which requires application of the new guidance at the beginning of the earliest comparative period presented in the year of adoption (i.e. require a restatement of comparatives with the cumulative impact adjusting the beginning of the retained earnings).

The leases project began as a joint project with the IASB, and many of the requirements in Topic 842 of US GAAP are the same as the requirements in IFRS 16.  A key difference between the two standards is that FABS adopted dual model lease classification approach while the IASB adopted a single model approach.

The implementation requires review of all existing lease contracts, classification, measurement of liabilities and assets, and the adoption impact needs to be remeasured.  The implementation will be time consuming and requires advance plan.  The new lease accounting standard requires organizations to recognize most leases on-balance sheet, which increases their reported assets and liabilities. For many companies, implementation of the new leasing standard will have broad organizational impacts beyond general accounting and financial reporting, including areas such as treasury, internal audit, IT, tax, budgeting, training, regulatory, contract management, and forecasting.

Note that the new standard will also have a significant impact to deferred tax position.  A prompt assessment should be performed now to develop an efficient and timely implementation plan.

KYJ LLP advisors are ready to assist you with lease accounting change and adoption of the standard.

Click here to view full ASU 2016-02 Topic 842 from FASB or go to FASB website to view the full publication.

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