Leases (Topic 842) - FASB

1 Leases ( topic 842 ) No. 2016-02 February 2016 An Amendment of the FASB accounting standards Codification The FASB accounting standards Codification is the source of authoritative generally accepted accounting principles (GAAP) recognized by the FASB to be applied by nongovernmental entities. An accounting standards Update is not authoritative; rather, it is a document that communicates how the accounting standards Codification is being amended. It also provides other information to help a user of GAAP understand how and why GAAP is changing and when the changes will be effective.

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4 2016-02 February 2016 Leases ( topic 842 ) accounting standards UpdateFinancial accounting standards board accounting standards Update 2016-02 Leases ( topic 842 ) February 2016 CONTENTS Page Numbers Summary .. 1 9 Amendments to the FASB accounting standards Codification .. 11 333 Section A Leases : Amendments to the FASB accounting standards Codification .. 11 185 Section B Conforming Amendments Related to Leases : Amendments to the FASB accounting standards Codification .. 186 333 Background Information and Basis for Conclusions .. 334 484 Amendments to the XBRL Taxonomy.

5 485 1 Summary Why Is the FASB Issuing This accounting standards Update (Update)? The FASB is issuing this Update to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. To meet that objective, the FASB is amending the FASB accounting standards Codification and creating topic 842 , Leases . This Update, along with IFRS 16, Leases , are the results of the FASB s and the International accounting standards board s (IASB s) efforts to meet that objective and improve financial reporting.

6 Leasing is utilized by many entities. It is a means of gaining access to assets, of obtaining financing, and/or of reducing an entity s exposure to the full risks of asset ownership. The prevalence of leasing, therefore, means that it is important that users of financial statements have a complete and understandable picture of an entity s leasing activities. Previous Leases accounting was criticized for failing to meet the needs of users of financial statements because it did not always provide a faithful representation of leasing transactions.

7 In particular, it did not require lessees to recognize assets and liabilities arising from operating Leases on the balance sheet. As a result, there had been long-standing requests from many users of financial statements and others to change the accounting requirements so that lessees would be required to recognize the rights and obligations resulting from Leases as assets and liabilities. Many of the criticisms associated with previous Leases guidance related to the accounting for operating Leases in the financial statements of lessees, and addressing those concerns with lessee accounting was the main focus of the Boards.

8 As such, the Boards decided to not fundamentally change lessor accounting with the amendments in this Update. However, some changes have been made to lessor accounting to conform and align that guidance with the lessee guidance and other areas within generally accepted accounting principles (GAAP), such as Topic 606, Revenue from Contracts with Customers. Who Is Affected by the Amendments in This Update? topic 842 affects any entity that enters into a lease (as that term is defined in this Update), with some specified scope exemptions. The guidance in this Update supersedes Topic 840, Leases .

9 2 How Do the Main Provisions Differ from Current Generally Accepted accounting Principles (GAAP) and Why Are They an Improvement? The main difference between previous GAAP and topic 842 is the recognition of lease assets and lease liabilities by lessees for those Leases classified as operating Leases under previous GAAP. During redeliberations, the board considered the feedback received throughout the project and in response to the different models proposed in the FASB Discussion Paper, Leases : Preliminary Views, the 2010 proposed accounting standards Update, Leases (Topic 840), and the 2013 proposed accounting standards Update, Leases ( topic 842 ).

10 The board decided that, consistent with all three proposals, lessees should be required to recognize the assets and liabilities arising from Leases on the balance sheet. Throughout the project, the board consulted extensively on the approach to lease expense recognition and considered a number of alternatives. The feedback received indicated that stakeholders had various views about the economics of lease transactions. The board ultimately reached the conclusion that the economics of Leases can vary for a lessee and that those economics should be reflected in the financial statements; therefore, topic 842 retains a distinction between finance Leases and operating Leases .