On February 25, 2016, the FASB (Financial Accounting Standards Board) issued Accounting Standards Update No. 2016-02, Leases (Topic 842). The FASB has been working in conjunction with the IASB (International Accounting Standards Board) to develop new lease standards for over a decade. On January 13, 2016, the IASB issued International Financial Reporting Standard (IFRS) 16, Leases.
ASU No. 2016-02 includes a lessee accounting model that recognizes two types of leases – finance leases and operating leases. (Note: lessor accounting will remain largely unchanged from current GAAP.) The standard requires that a lessee recognize on the balance sheet assets and liabilities for leases with lease terms of more than 12 months. (Leases with terms of less than 12 months are exempt from the new standard.) The recognition, measurement, and presentation of expenses and cash flows arising from a lease by a lessee will depend on its classification as a finance or operating lease.
New disclosures to help investors and other financial statement users better understand the amount, timing, and uncertainty of cash flows arising from leases are also required. These disclosures include qualitative and quantitative requirements, providing information about the amounts recorded in the financial statements.
For a public entity, the amendments are effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years (that is, for a calendar year-end public entity, the changes take effect beginning January 1, 2019). Accounting pronouncements are eligible to be tested on the CPA exam in the later of (1) the first testing window beginning after the pronouncement’s earliest mandatory effective date or (2) the first testing window beginning six (6) months after the pronouncement’s issuance date. In either case, there is a simultaneous introduction of content related to the new pronouncement and removal of content related to the previous pronouncement. Therefore, ASU No. 2016-02, Leases, will become testable July 2019.
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