FASB Releases Lease Accounting Standards Update (ASU 2016-02)

FASB has issued its long-awaited lease accounting standards update that impacts non-profits. The update aims to improve financial reporting about leasing transactions and will affect all non-profits that lease assets such as space and equipment.

What Has Changed?

• Non-profits that lease assets will be required to recognize on their balance sheets the assets and liabilities for the rights and obligations created by those leases.
• Specifically under the new guidance, a lessee will be required to recognize assets and liabilities for leases with terms of more than 12 months.
• Two different types of leases still exist, but both types of leases (finance or operating) will now be required to be recognized on the balance sheet.
• Disclosures (both qualitative and quantitative) will now be required to help users to better understand the amount, timing, and uncertainty of cash flows arising from leases.

When Is The Update Effective?

The Update will take effect for fiscal years beginning after December 15, 2018 (and interim periods within those fiscal years) for any of the following:

• A public business entity
• A not-for-profit entity that has issued, or is a conduit bond obligor for, securities that are traded, listed, or quoted on an exchange or an over-the-counter market
• An employee benefit plan that files financial statements with the U.S.
• Securities and Exchange Commission (SEC)

For all other entities (which will include the majority of not-for-profits), the amendments in this Update are effective for fiscal years beginning after December 15, 2019, and interim periods within fiscal years beginning after December 15, 2020. Early applications of the amendments of the update are permitted.

What Should My Organization Do Now?

It is recommended you begin some preliminary steps now:

• It will be essential to inventory all of your leases. It will take time to conduct this inventory and calculate the asset and liability amounts at the date of adoption in order to include them in the financial statements.
• Determine if the recognition of additional lease liabilities will impact any debt covenants or other contractual agreements.
• Develop a timeline to review the Update and then implement its provisions.

Do you have questions regarding this Update? Contact bkrisher@md-cpas.com to explore the implications for your organization.

Please note this summary update of ASU 2016-02 is not meant to substitute for reading the Statement in its entirety.