In early 2016, the Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB) both issued new guidelines for financial reporting of leasing transactions. FASB sets standards for Generally Accepted Accounting Principles (GAAP) in the United States; IASB determines the International Financial Reporting Standards (IFRS). Also, in 2017, the Government Accounting Standards Board (GASB) issued new guidelines for reporting leases.
Under the new standards, FASB, IASB, and GASB now recognize all long term lessee transactions on the balance sheet. Previously, only finance leases (purchase agreements) appeared as liabilities on the balance sheet. Companies were not required to disclose long-term liabilities (greater than one year) associated with their operating leases.
Under the new guidance, to account for these liabilities, lessees are required to determine the net present value of all their leasing obligations given a discount rate and set up a Lease Liability and offsetting Right of Use Asset. Initially, the asset and liability on the balance sheet will equal the present value of future lease payments. Carry-forwards and Initial Direct Costs can be added to the Right of Use Asset balance as required.
Several notable differences exist between the new FASB, IASB, and GASB accounting standards. While GASB and IASB will treat all leases as finance leases, FASB distinguishes two types: finance leases and operating leases. Most real estate leases will classify as operating leases under FASB, which calls for recognizing total leasing costs on a straight-line basis. In contrast, since the GASB and IASB models only account for finance leases and include an interest component, the leasing costs are front-loaded and decrease over time as the lease liability amount amortizes.
Under all models, reporting organizations are required to determine the lease term and the cost of borrowing for calculating present value and liability interest subjectively. In Yardi Corporate Lease Manager, the interest rate can be specified on a global level, and fine-tuned on a property by property, or even lease by lease basis. The lease term may include option periods when there is a level of certainty about an option being exercised. You can even do scenario modeling and calculate Present Value (PV) and amortization schedules for all the options on a given lease.
All standards exempt short-term leases of less than 12 months from capitalization on the balance sheet. In addition, IFRS provides an exemption for low value assets.
Author: Janet Spargur