The Federal Accounting Standards Board (FASB) and International Accounting Standards Board (IASB) recently issued new revisions to lease accounting. There are elements of the new standard that could impact almost all entities, including nonprofit organizations. Although there were some significant points of divergence, both Boards noted that their respective standards fulfill the key objectives of lessee recognition of lease-related assets and liabilities on the balance sheet and enhanced transparency.
Under the new lease accounting standard, lessees will need to recognize a right-of-use asset and a lease liability for virtually all of their leases (other than short-term leases). The liability will be equal to the present value of lease payments. The asset will be based on the liability, subject to adjustment, such as for initial direct costs.
For income statement purposes, the FASB has retained a dual model, requiring leases to be classified as either operating or finance. Operating leases will result in a straight-line expense (similar to current operating leases) while finance leases will result in a front-loaded expense pattern (similar to current capital leases).
Lessees will be required to disclose the nature of the lease, significant judgments and assumptions used to account for leases, lease expense amounts for finance and operating leases, and maturity tables for lease liabilities.
Effective Date and Transition
The standard is effective for US GAAP public companies for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. For private companies (i.e., those not meeting the FASB’s definition of a public business entity), the standard is effective for fiscal years beginning after December 15, 2019 and interim periods beginning the following year. Early adoption is permitted. The new standard must be adopted using a modified retrospective transition, and provides for certain practical expedients. Transition will require application of the new guidance at the beginning of the earliest comparative period presented.
Your organization’s management and board of directors should begin now to discuss the impact of the new accounting standards and how this may impact future strategic plans - including lease-or-buy decisions.
Take the time to review existing lease agreements for specific provisions that will be affected by the new accounting and disclosure requirements, including variable rents, service components, renewal and purchase options, residual guarantees, and future rent increases.
Also, consider any potential impact of changes to the balance sheet on loan covenants and compensation arrangements. By talking with your accountant and taking these preparatory steps now, your nonprofit will be on solid footing to accept the new lease accounting standards.