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In June 2020, the FASB issued ASU 2020-05 and delayed, for a second time, ASU 2016-02, Leases Topic 842 for non-public entities to be effective for annual periods beginning after December 15, 2021 and for public not-for-profit entities to be effective for annual periods beginning after December 15, 2019. Since its initial release, discussions around Topic 842 have typically focused on how lease accounting changes will affect lessees, but what about the parties on the other side of the contract? Although lessor accounting has not been fundamentally changed, the impact felt by lessees inevitably trickles over to those who own the leased assets. In addition, with the release and adoption of new revenue recognition standards under Topic 606, criteria have been updated to better align key aspects of lessor accounting with the new standard.
The following key changes to lessors have been implemented under Topic 842
Topic 842 does not substantially change lessor accounting models. The criteria and classification of leases remain similar to current guidance with leases classified into the following types: operating, sales-type, or direct financing leases. Overall balance sheet and income statement treatment remain relatively unmodified.
How could this impact lessors from an operational standpoint? Lessees are now required to report both an asset and liability for any operating leases that are longer than a 12-month term. Bringing these transactions onto the balance sheet will impact lessees in a number of ways, not limited to increases and impacts in balance sheet leverage and ratios which may affect debt covenant calculations. This may shift lessees to request shorter-term leases or drive an overall increase in lessee negotiation or scrutinization of lease terms, as the impact of these transactions now impacts their balances sheets. These changes can ultimately affect the lease income recognized by those who own the assets.
Organizations need to find a suitable solution for calculating the FASB ASC Topic 842 right-of-use assets and lease liabilities at the transition date and the subsequent lease accounting. Generally, an Excel-based solution would be appropriate for a noncomplex portfolio of 10 or fewer leases. If the lease profile is more complex or greater than 10 individual leases, management is better served by a lease software solution, such as simpLEASE. In addition to offering our clients simpLEASE, Schneider Downs provides advisory services for the technical aspects of lease accounting. For more information concerning lease accounting and the impact on your organization, please visit the Schneider Downs Our Thoughts On blog or email us at [email protected].
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