On February 25, 2016, the FASB issued ASU 2016-02, which is the new Leases standard (ASC 842). Although the accounting applied by a lessor is largely unchanged from the current guidance, the accounting applied by a lessee has significantly changed. The biggest change under the new standard is that all leases (regardless of whether the lease was classified as finance lease or as an operating lease) will result in recognition of lease liability and lease asset by the lessee. The only exception to this rule is for short term leases that are defined as a lease with a term of 12 months or less. For short term leases, a lessee is permitted to make an accounting policy election, not to recognize lease assets and lease liabilities.
Under the current leases guidance (ASC 840), a lease that is classified as an operating lease is basically accounted for by a lessee as a rental contract, and no asset or liability for the lease is recognized. An asset and an obligation at an amount equal to the present value of the minimum lease payments are recognized only for capital leases.
Under the new standard (ASC 842), even for operating leases, a lessee must recognize in the statement of financial position a lease liability and a lease asset (i.e., right-of-use asset) at an amount of present value of the lease payments.
The new leases standard (ASC 842) is effective for public entities for fiscal years beginning after December 15, 2018. On the CPA exam, this standard is testable only from 2019.
To learn more about changes to the CPA Exam, use our helpful CPA Exam resource.