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New year, new lease standard! If you currently lease an asset, prepare to implement the new lease accounting guidance issued by the Financial Accounting Standards Board (“FASB”) Accounting Standard Update (“ASU”) 2016-02, Leases.

In order to minimize off-balance sheet reporting and enhance usefulness to financial statement users, the FASB issued ASU 2016-02, which namely updates lease accounting from the Lessee’s perspective. Accounting for leases from the Lessor’s perspective is largely unchanged, with the Lessor still required to categorize leases as either sales-type, direct financing, or operating.

Under current FASB guidance, leases from the Lessee’s perspective are categorized as operating or capital based on certain criteria. ASU 2016-02 now refers to leases as either operating or financing. Financing, previously capital, leases are treated in a similar manner to the previous guidance under ASU 2016-02.

With the new update, leases determined to be operating leases are recognized on the balance sheet as a right-of-use (“ROU”) asset and liability, unless the lease term is less than twelve months. The ROU asset and liability should be recorded at the present value of the remaining lease payments, with the ROU asset adjusted for initial direct costs, prepaid or accrued lease payments, and lease incentives received. Income statement and cash flow reporting remains substantially unchanged.

If you currently hold a lease classified under current guidance as operating, you will need to recognize the lease on the balance sheet at the earliest period presented using the modified retrospective approach unless the lease has been modified. There are numerous practical expedients available to assist in identifying and measuring leases. In summary, an adjustment will need to be made retrospectively to recognize and measure operating leases on the balance sheet.

In addition to the changes discussed above, ASU 2016-02 features updates to both sale-leaseback transactions and disclosure requirements.

For public entities, ASU 2016-02 becomes effective for fiscal years beginning after December 15, 2018. For all other entities, it becomes effective for fiscal years beginning after December 15, 2019. Early adoption is permitted.

For assistance in implementing the new lease accounting standard update or for additional information, please feel free to contact Kristi Yanover, Audit Partner, at (858) 558-9200, or any member of our Accounting & Assurance Team, as we would be happy to assist you.

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