Determining what is a lease may be first challenge for new standard

The FASB’s new lease accounting standard may not seem like as big of a change to accounting as other big-ticket standards coming into effect soon, but companies will still have work to do.

The first challenge: determining what is a lease and what is not, said expert panelists at the AICPA Conference on Current SEC and PCAOB Developments in Washington on Dec. 7, 2016.

Published in February after a decade of debate, Accounting Standards Update (ASU) No. 2016-02, Leases (Topic 842), requires companies to report on their balance sheets their leased office space, storefronts, vehicles, and equipment as assets, and the rent they owe for them as liabilities. It goes into effect in 2019 for public businesses and is expected to make company balance sheets swell.

The standard defines a lease as a contract, or part of a contract, that conveys the right to control the use of a rented asset. The concept of control is a key change from current GAAP’s definition of a lease, and it means that the customer has both the right to benefit from substantially all of the economic benefits of the asset, as well as the right to direct its use.

While most existing leases will continue to be leases under the new standard, many more types of arrangements may captured under the new lease definition and will have to follow the new accounting rules, said Deloitte & Touche LLP partner James Barker.

“There are many, many potential leases that don’t say ‘lease’ on the cover,” Barker said. “You need to look for leases that aren’t legal form leases and think about whether a service you’re receiving — or providing, for that matter — contains dedicated equipment, and if so, there might be a lease in there that needs to be broken out.”

This is exactly the situation that Xcel Energy, Inc., is in, said Richard Briggs, manager of technical accounting for the energy company. Briggs said his company needs to figure out whether some of its agreements with farmers and other land owners to place wind facilities on their properties contain leases.

“The lease definition did change and we are having to go back and reexamine the contracts and take a fresh look whether they contain leases,” Briggs said.

Daniel Murdoch, corporate controller for Comcast Corp., said accountants at the cable network and communications company have been debating whether the 22 million cable boxes Comcast rents to cable television customers should be considered lease arrangements.

The leases standard is the culmination of years of debate on how to make balance sheets better reflect companies’ true liabilities.

Under existing lease accounting rules, companies only have to record lease obligations on their balance sheets when the arrangements are akin to financing transactions, such as rent-to-own contracts for buildings or vehicles. Few actually get recorded, however, because of what critics call “bright lines” in the rules that allow businesses to structure most deals to look like simple rentals. If an obligation is not recorded on a balance sheet, it makes a business look like it is less leveraged than it really is. Critics for years have said that a retailer that pays rent for hundreds of storefronts has just as many financial obligations as a retailer that takes out mortgages to buy them.

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