The FASB’s new lease accounting standard, ASU 2016-02, Leases (Topic 842), was issued on February 25, 2016, and presents dramatic changes to the balance sheets of lessees. Topic 842 was developed to provide financial statement users with more information about an entity’s leasing activities.
Lessees will recognize all leases, including operating leases, with a term greater than 12 months, on its balance sheet. The effect on leases will be direct, affecting investor and analyst expectations and potentially compliance with contractual covenants.
Lessee accounting will require new significant judgments and reassessments during the lease term, which will require changes in processes and internal controls. In addition IT systems may need to be upgraded or modified to ensure all leases are captured and lease data necessary to apply Topic 842 are accumulated.
Topic 842 applies to arrangements that meet the definition of a lease. For the definition of a lease and details on how the Topic 842 will apply to lessee’s, read more about lease standards here.