The Accounting Standards Update (ASU) affects all companies and other organisations that lease assets such as real estate, airplanes, and manufacturing equipment.

As a result, organisations that lease assets – lessees – will have to recognise the assets and liabilities for the rights and obligations created by those leases on the balance sheet.

‘The new guidance responds to requests from investors and other financial statement users for a more faithful representation of an organisation’s leasing activities,’ stated FASB chair Russell G Golden.

‘It ends what the US Securities and Exchange Commission (SEC) and other stakeholders have identified as one of the largest forms of off-balance sheet accounting, while requiring more disclosures related to leasing transactions.

‘The guidance also reflects the input we received during our extensive outreach with preparers, auditors, and other practitioners, whose feedback was instrumental in helping us develop a cost-effective, operational standard,’ he added.

Lack of convergence

Despite attempts to produce a single lease standard approach for all global preparers reporting under International Financial Reporting Standards and US GAAP, the International Accounting Standards Board (IASB) and FASB could not agree on a unified approach and as a result there are two standards with varying positions with the US taking a dual model approach to its leasing standard.

Under the new FASB guidance, a lessee will be required to recognise assets and liabilities for leases with lease terms of more than 12 months.

Consistent with current US GAAP, the recognition, measurement and presentation of expenses and cashflows arising from a lease by a lessee primarily will depend on its classification as a finance or operating lease.

However, unlike current GAAP, which requires only capital leases to be recognised on the balance sheet, the new ASU will require both types of leases to be recognised on the balance sheet.

The ASU also will require disclosures to help investors and other financial statement users better understand the amount, timing, and uncertainty of cash flows arising from leases.

These disclosures include qualitative and quantitative requirements, providing additional information about the amounts recorded in the financial statements.

The accounting by organisations that own the assets leased by the lessee - also known as lessor accounting - will remain largely unchanged from current GAAP.

However, the ASU contains some targeted improvements that are intended to align, where necessary, lessor accounting with the lessee accounting model and with the updated revenue recognition guidance issued in 2014.

The FASB and the IASB first embarked on a joint project in 2006 to improve the financial reporting of leasing activities. Since that time, the FASB and the IASB have issued three documents for public comment that generated more than 1,700 comment letters.

The IASB issued IFRS 16 Leases, the final standard on leases on 12 January 2016.

The ASU on leases will take effect for public companies for fiscal years, and interim periods within those fiscal years, beginning after 15 December 2018. For all other organisations, the ASU on leases will take effect for fiscal years beginning after 15 December 2019, and for interim periods within fiscal years beginning after 15 December 2020.

Early application will be permitted for all organisations, unlike the IFRS 16 which can only be early adopted if the reporting entity is already using IFRS 15 Revenue from Contracts with Customers.

The FAB will host a live webcast on the Accounting Standards Update on Leases on 29 March 2016, from 1:00 to 2:00 p.m. EDT.

The webcast will feature FASB Members Marc Siegel and Daryl Buck discussing the ASU with FASB staff, and answering questions submitted by viewers. To register for the event, click here