With a large number of leases and significant dollar amounts, starting this analysis now will be a good idea.A starting point is a list of all the entity’s leases, including terms of the leases, enabling determination of lease type.Financial statement users are continually seeking transparency and comparability, and in its efforts to obtain feedback from financial statement users, the FASB concluded that the existing lease guidance did not meet the needs of users because, despite disclosure in the notes to the financial statements, it did not a require lessees to present assets and liabilities arising from operating lease activities.
As such, most leases, especially real estate leases, are off-balance-sheet but disclosed as commitments in the notes to the financial statements.
Lease Type Determination Changes One of the key differences between the existing and new standards is in the nature of determining the lease type.
Under the existing standard, if any one of four conditions are met, the lease is considered a capital lease and placed on the balance sheet.
The four conditions are treated as a “bright-line” test and if the thresholds are met, the lease is a capital lease.
If one of the metrics is just short of the threshold, then the lease is an operating lease. generally accepted accounting principles (GAAP) can create two very different accounting outcomes for what can be two economically similar transactions.