LEASE ACCOUNTING REGULATIONS – HOW TO GET COMPLIANT
The Financial Accounting Standard Board (FASB) Update ASC 842 and International Accounting Standards Board (IASB) IFRS 16 is requiring that leases be shown as an asset/liability on a company’s balance sheet. From a high-level, leases must recognize the leased asset on the balance sheet (for a lessee or a lessor).
WHO IS AFFECTED BY NEW LEASE ACCOUNTING REGULATIONS?
Any company who leases most of company equipment, or who leases property. Industries affected include:
- Real Estate
WHEN WILL THE NEW REGULATIONS GO INTO EFFECT?
The effective date for public companies is December 15, 2018. The effective date for private companies is December 15, 2019.
WHY THESE NEW STANDARDS?
The primary reason for the new regulations is to ensure transparency into a company’s leased assets and liabilities. Prior to this revised standard, lease assets and liabilities were not clearly identified as they may be embedded in different parts of the business, including service agreements, as a simple accounts payable transaction, or they are provided along with goods and services.
Lessees must recognize leased assets on the balance sheet for both property (office space, retail space, industrial warehouses, etc.) and non-property (office equipment, vehicles, etc.). Lessors of property will also need to conform to the revenue recognition accounting standard “Revenue from Contracts with Customers” but following the adoption timeline for the lease accounting standard.
New global Lease Management regulations will require many companies to change how they account and report lease transactions. Lessors will continue to report rent on a straight-line basis and will also need to adhere to the new revenue recognition accounting standards.
BALANCE SHEET LEASE ACCOUNTING THROUGH JD EDWARDS
With the changes virtually, all lessors or lessees will be required to calculate lease values and make those calculations to their current balance sheets. In addition, those lease values will need to be reduced on a periodic basis.
For JD Edwards users, Oracle has announced the availability of JD Edwards Lease Management Enhancements to support new global lease accounting standards.
These enhancements (specifically in the Fixed Assets, Real Estate Management and General Accounting modules) were created and designed to meet these new requirements.
Decisions need to be made about when and how to transition to the new standard and when to upgrade JD Edwards systems with the new features to support the new standard.