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New Lease Accounting

On February 25, 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-02, Leases (Topic 842). This new ASU is effective for fiscal years beginning after December 15, 2018 for a public business entity and one year later (i.e. after December 15, 2019) for non-public entities. Lessees will be impacted the most by this standard. The major change is that lessees will need to recognize a “right-of-use” asset and a lease liability for substantially all of their leases (excluding leases that are considered short-term, generally 12 months or less, as defined in the standard). The asset recognized is based on the liability amount recorded which, in turn, is based on the present value of the future lease payments. The recognition, measurement, and presentation of expenses and cash flows arising from a lease by a lessee have not significantly changed from previous generally accepted accounting principles. The standard requires additional quantitative and qualitative financial statement footnote disclosures. Companies will need to apply this standard to existing leases at the effective date by recognizing the “right-of-use” asset and a lease liability for lessees. Beyond impacting the presentation of financial statements, the change may impact bank debt covenants and state income tax apportionments. Companies should start sooner rather than later on assessing the impact the new lease standard will have on its financial statements and other financial metrics.

For more information, please contact Denis Higgins.