FASB’s New Accounting Standard on Leases: Overview of Some Key Requirements for Lessees and Implementation Considerations

The Financial Accounting Standards Board (FASB) issued its long-awaited new standard on the accounting for leases in Accounting Standards Update (ASU) 2016-02, on February 25, 2016. Since ASU 2016-02 focuses primarily on lessee accounting, this article will emphasize new key requirements for lessees and provide information about the ASU 2016-02’s effective date and transition provisions, as well as implementation considerations. In the interest of brevity, this article has been written for the benefit of professionals and students who already understand the previous U.S. GAAP for lease contracts. The reader will learn that the central point of ASU 2016-02 is that lessees need to recognize the assets and liabilities that arise from their leases. This is its primary improvement over the previous GAAP, which did not require lease assets and lease liabilities to be recognized for many leases. Now, the sole exception will be for leases with a term of 12 months or less. This article will also explain the core similarity with previous GAAP, that operating leases are allowed to recognize the expense of the lease on a straight-line basis over the term of the lease.