The new lease accounting standard recently became effective for private companies. Here are answers to many questions being asked about ROU assets.
As of Jan. 1, 2022, the Financial Accounting Standards Board (FASB) lease accounting standard, Accounting Standards Codification (ASC) 842, “Leases,” became effective for many private companies, requiring lessees to recognize most leases on their balance sheets. But many organizations still have questions about how to get up to speed on preparation and compliance.
The most significant change under this new guidance is that lessees now need to recognize a lease liability and corresponding right-of-use (ROU) asset for those leases previously classified as operating leases. Consequently, all leases, whether finance or operating, now will be on balance sheet unless they are subject to the short-term lease accounting policy election. A lessor’s accounting for direct-finance, sales-type, and operating leases under the new standard is similar to existing GAAP.
For lessees, most capital leases under existing GAAP will be accounted for as finance leases under the new standard. Similarly, most operating leases under existing GAAP will remain operating.
Under the new standard, a lessee evaluates whether a lease is classified as finance or operating at the commencement of a new lease and upon a change in the lease term or change in the lessee’s option to purchase the asset. The criteria for classifying a lease is, in most cases, generally consistent with existing GAAP.
The differences in lease classification are outlined in the following table: