FASB Issues Leasing Standard
On February 25, 2016, the Financial Accounting Standards Board (FASB) issued its highly anticipated leasing standard for both lessees and lessors. Under its core principle, a lessee will recognize leased assets and liabilities on their statement of financial position/balance sheet for all arrangements with terms longer than 12 months. Lessor accounting remains largely consistent with existing U.S. GAAP. The new standard takes effect in 2019 for public business entities and 2020 for all other entities. Entities may adopt the provisions of this standard early.
The new standard applies a right-of-use (ROU) model that requires a lessee to record, for all leases with a lease term of more than 12 months, an asset representing its right to use the underlying asset for the lease term and a liability to make lease payments. The lease term is the noncancellable period of the lease, and includes both periods covered by an option to extend the lease, if the lessee is reasonably certain to exercise that option, and periods covered by an option to terminate the lease, if the lessee is reasonably certain not to exercise that termination option.
For leases with a lease term of 12 months or less, a practical expedient is available whereby a lessee may elect, by class of underlying asset, not to recognize an ROU asset or lease liability. A lessee making this accounting policy election would recognize lease expense over the term of the lease, generally in a straight-line pattern.
At inception, lessees must classify all leases as either finance or operating. Balance sheet recognition of finance and operating leases is similar, but the pattern of expense recognition in the income statement will differ depending on the lease classification. A finance lease is a lease arrangement in which the lessee effectively obtains control of the underlying asset. In an operating lease, the lessee does not effectively obtain control of the underlying asset.
The new standard requires a lessor to classify leases as either sales-type, direct financing or operating, similar to existing U.S. GAAP.
In transition, a lessee and a lessor will recognize and measure leases at the beginning of the earliest period presented using a modified retrospective approach. The modified retrospective approach includes a number of optional practical expedients. These practical expedients relate to identifying and classifying leases that commenced before the effective date, initial direct costs for leases that commenced before the effective date and the ability to use hindsight in evaluating lessee options to extend or terminate a lease or to purchase the underlying asset.
An entity that elects to apply the practical expedients would, in effect, continue to account for leases that commenced prior to the effective date in accordance with previous guidance unless the lease is modified, except that lessees would recognize an ROU asset and a lease liability for all operating leases at each reporting date based on the present value of the minimum rental payments that were determined under previous guidance.
All entities should review this new standard and familiarize themselves with the content and determine the effect that the implementation will have on their financial statements.
Update on FASB’s Not‑for‑Profit Financial Reporting Exposure Draft
The FASB met several times during the month of March to continue its redeliberation on the proposed Accounting Standards Update, Not-for-Profit Entities (Topic 958) and Health Care Entities (Topic 954): Presentation of Financial Statements of Not-for-Profit Entities. At these meetings, the board focused on the following topics.
Operating measures and liquidity
- Disclosures about operating measures by those not-for-profit entities (NFPs) that choose to present such a measure
- Information useful in assessing liquidity and availability of resources
The board decided to enhance the current reporting requirements for those NFPs that present a self-defined measure in a statement of activities (or change in net assets) that also presents internal board designations, appropriations and similar actions on the face of the financial statements affecting that measure. Those NFPs would be required to report these types of internal transfers appropriately disaggregated and described by type, either on the face of the financial statements or in the notes. The board directed the staff to provide illustrations in the final standard that would assist NFPs in reporting this information.
The board decided to modify the proposal to clarify the objectives of providing information useful in assessing an NFP’s liquidity and the type of information that financial statements are capable of providing for that purpose. The board decided to require that NFPs provide the following information:
- Qualitative information in the notes that communicates how an NFP manages its liquid resources available to meet cash needs for general expenditures within one year of the statement of financial position (SOFP) (balance sheet) date
- Quantitative information either on the face of the SOFP (balance sheet) or in the notes, and additional qualitative information in the notes as necessary, that communicates the availability of an NFP’s financial assets at the SOFP date to meet cash needs for general expenditures within one year of the SOFP. Availability of a financial asset may be affected by (a) its nature; (b) external limits imposed by donors, laws and contracts with others; and (c) internal limits imposed by governing board decisions
The board directed the staff to include illustrations in the standard to assist NFPs with the presentation of these items as well.
Expense presentation
- Current requirement for NFPs to report expenses by their functional classification
- Proposed requirement for NFPs to report all expenses in one location, with an analysis of operating expenses by their function and nature
The board decided to retain the current requirement for NFPs to report expenses by their functional classification either on the statement of activities or in the notes to the financial statements.
The board decided to require NFPs to report all expenses (other than netted investment expenses) by function and nature in one location. The NFP can report this information on the face of the statement of activities, in a separate statement, or in the notes to the financial statements. An NFP will be required to show the relationship between its functional and natural classification by disaggregating its functional categories by their natural classification. The board directed the FASB staff to explore whether business-oriented health care NFPs should provide disaggregated information by segments. This will be addressed either in Phase 2 of the project or in a future project.
Transition method and effective date
The board decided that NFPs should apply the amendments on a retrospective basis for all years presented. However, if presenting comparative financial statements, NFPs would have the option to omit the following information for any years presented before the year of adoption:
- Analysis of expenses by both functional and natural classification
- Disclosures around liquidity and availability of resources
The board decided that the amendments would be effective for financial statements for fiscal years beginning after December 15, 2017 and for interim financial statements for periods after that date. The Board also decided to permit early adoption subject to the transition method above.
This article originally appeared in BDO USA, LLP’s “Nonprofit Standard” newsletter (Spring 2016). Copyright © 2016 BDO USA, LLP. All rights reserved. www.bdo.com
