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In 2016, the Financial Accounting Standards Board (FASB) published guidance that requires major changes to how leases are reported on financial statements. One area of the guidance that\u2019s especially complicated relates to \u201cembedded\u201d leases.<\/p>\n
Updated guidance<\/strong><\/p>\n Accounting Standards Update (ASU) No.\u00a02016-02, Leases (Topic\u00a0842)<\/em>, requires organizations to report on the balance sheet the assets and liabilities associated with leasing office space, vehicles and other assets. Public companies implemented the updated guidance in 2019.<\/p>\n In June, the FASB extended the effective date for ASU\u00a02016-02 for private companies and not-for-profit organizations. The one-year deferral is welcome news for smaller organizations that have been trying to get a handle on the complex new rules during the COVID-19 crisis.<\/p>\n Hidden in the fine print<\/strong><\/p>\n In some cases, a contract that qualifies as a lease doesn\u2019t have the word \u201clease\u201d written across the top. Instead, a lease may be embedded in a contract\u2019s terms.<\/p>\n Unless private companies and nonprofits adopted the changes early, they\u2019re currently expensing operating lease payments as they\u2019re incurred, as per prior guidance. Carving out embedded leases from supply or service contracts wasn\u2019t a big deal under those rules; the costs would be classified as operating expenses either way. But the updated guidance requires service contract payments to continue being expensed while embedded leases are reported on the balance sheet.<\/p>\n The updated guidance is clear about the identification and criteria for an embedded lease: A contract contains a lease if it conveys the right to control the use of an identified asset in exchange for cash or other consideration. This includes the right to obtain substantially all the economic benefits from the asset for a specific period.<\/p>\n Equipment leases may be buried in supply and service contracts with equipment manufacturers. Likewise, lease agreements may contain nonlease components, such as maintenance and property taxes.<\/p>\n Implementation solutions<\/strong><\/p>\n During the implementation phase for the updated guidance, you\u2019ll need to train other departments, such as procurement, sales, operations and information technology, to recognize when contract terms convey the right to control the use of a specific asset. After implementation, you\u2019ll need to execute controls or processes to identify embedded leases when contracts are signed.<\/p>\n To simplify matters, consider adopting the practical expedient in the updated accounting guidance that allows lessors to combine lease and nonlease components. While this treatment will increase the lease liability reported on your balance sheet, simplified reporting may be worthwhile, depending on the size and duration of the embedded leases.<\/p>\n Contact us<\/strong><\/p>\n For private companies and private not-for-profits, the updated lease guidance now goes into effect for fiscal years beginning after December\u00a015, 2021 (or interim periods beginning after December\u00a015, 2022). For public not-for-profits, the updated guidance now goes into effect for fiscal years beginning after December\u00a015, 2019, including interim reporting periods.<\/p>\n A one-year deferral isn\u2019t an excuse to procrastinate. The issue of embedded leases shows how implementing the updated guidance can be challenging and may require significant changes to systems and procedures. We can help.<\/p>\n \u00a9 2020<\/em><\/p>\n <\/body> In 2016, the Financial Accounting Standards Board (FASB) published guidance that requires major changes to how leases are reported on financial statements. One area of the guidance that\u2019s especially complicated relates to \u201cembedded\u201d leases. Updated guidance Accounting Standards Update (ASU) No.\u00a02016-02, Leases (Topic\u00a0842), requires organizations to report on the balance sheet the assets and liabilities […]<\/p>\n","protected":false},"author":3,"featured_media":14828,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[1],"tags":[27],"class_list":["post-14829","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-uncategorized","tag-aa"],"_links":{"self":[{"href":"https:\/\/www.sfw.cpa\/news-and-guides\/wp-json\/wp\/v2\/posts\/14829","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.sfw.cpa\/news-and-guides\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.sfw.cpa\/news-and-guides\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.sfw.cpa\/news-and-guides\/wp-json\/wp\/v2\/users\/3"}],"replies":[{"embeddable":true,"href":"https:\/\/www.sfw.cpa\/news-and-guides\/wp-json\/wp\/v2\/comments?post=14829"}],"version-history":[{"count":0,"href":"https:\/\/www.sfw.cpa\/news-and-guides\/wp-json\/wp\/v2\/posts\/14829\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/www.sfw.cpa\/news-and-guides\/wp-json\/"}],"wp:attachment":[{"href":"https:\/\/www.sfw.cpa\/news-and-guides\/wp-json\/wp\/v2\/media?parent=14829"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.sfw.cpa\/news-and-guides\/wp-json\/wp\/v2\/categories?post=14829"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.sfw.cpa\/news-and-guides\/wp-json\/wp\/v2\/tags?post=14829"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}
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