New Lease Standard

Does your organization have a lease? 

If you do, you will likely be affected by the update to the accounting lease standard. 

The Financial Accounting Standards Board (FASB) has issued an update to the lease accounting standard, Accounting Standards Update 2016-02, Leases (Topic 842).  The purpose of this update is to increase the transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet/statement of financial position and disclosing key information about leasing arrangements.  It is important for the user of the financial statements to have a complete and understandable picture of an organization’s leasing activities. 

The main difference between the update and the previous guidance is the recognition of lease assets and lease liabilities by lessees for those leases classified as operating leases.  Previously, operating leases were expensed.  This change in accounting will also impact an organization’s loan covenants by recording additional liabilities on the financial statements.  

To qualify as a lease under the new standard, the agreement must be non-cancelable and for more than twelve months.  In addition, the lease must be for a physical asset (office space, copiers, vehicles, equipment, etc.).  Intangible assets such as software are not considered physical assets and therefore do not fall under this standard.  You must also have the right to control or use the asset and the asset must be explicitly or implicitly identified.   

Some nonprofit organizations receive below market leases or fully donated leases.  When a lease agreement’s payments are below the fair rental value of the property, the portion of the lease paid would fall under the new lease standard with the difference recognized as an in-kind contribution.  Fully donated leases should be recorded a contribution receivable and net assets with donor restrictions.

If your organization follows the cash basis or modified cash basis of accounting, the new lease update may not apply.  Since the cash basis of accounting only reports cash and net assets, the update does not apply.  For those organizations following the modified cash basis of accounting, you will need to use judgement to determine whether the update applies to your organization.  If you report fixed assets and the related debt to obtain fixed assets, this update may likely apply to your organization. 

The update is effective for years beginning after December 12, 2021.  In order to appropriately apply the new standard, it is important that you review all of your lease agreements so that they can each be recorded properly.

Contributed by: Carrie Minnich, MAcct, CPA | Director | DWD CPAs & Advisors