LEASES: Where We’re Headed A Chapter Supplement 917 Overview of the Proposed Guidance Underlying the new ASU is a dual concept of leases: Type A: The lease transfers substantially all the risks and rewards of ownership of the underlying asset. Type B: The lease does not transfer substantially all the risks and rewards of ownership. When we think about the way we classify leases under current GAAP, a Type A lease sounds like a capital lease, and a Type B lease sounds like an operating lease. However, the way we account for Type A and Type B leases is not the same as the way we account for capital leases and operating leases. For lessees (the users of the asset), a fundamental difference between current GAAP and the proposed approach is that, under the proposed approach, the lessee reports both an asset and a liability for both Type A and Type B leases. Under current GAAP, the lessee reports an asset and a liability only for capital leases. Expense recognition for both types of leases is similar to current GAAP, with Type A leases producing more expense early in the life of the lease (as capital leases do currently), and Type B leases producing an equal amount of expense each period (as operating leases do currently). We account for leases differently for Type A and Type B leases. GAAP Change The new guidance for lease accounting eliminates the concept of operating leases. The FASB and the IASB are collaborating on several major new standards designed in part to move U.S. GAAP and IFRS closer together (convergence). This Supplement is based on their most recent joint Exposure Draft of the new leases standard update (Topic 842), modified by more recent “tentative decisions.” 35 At the time this text went to press, the Boards were considering several alternative responses to comments they received on the Exposure Draft. Despite some unsettled specifics, there is broad agreement regarding the fundamental aspects of the proposed guidance for lease accounting. Accordingly, our focus in this supplement is on the broad accounting issues. Even after a new Accounting Standard Update (ASU) is issued, previous GAAP will be relevant until the new ASU becomes effective (likely not before 2018), and students taking the CPA or CMA exams will be responsible for the previous GAAP until six months after that effective date. Additionally, prior to the effective date of the new ASU, it is useful for soon-to-be graduates to have an understanding of the new guidance on the horizon. 35 Because an ASU had not been finalized as of the date this text went to press, some aspects of the eventual ASU may be different from what we show in this Supplement. Check the book’s FASB Updates page ( http://lsb.scu.edu/jsepe/fasb-update-8e.htm ) to see if any changes have occurred.
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