When issued in 1976, Statement of Financial Accounting Standards No. 13, Accounting for Leases (generally known as FAS 13) was the most complex standard ever issued by the Financial Accounting Standards Board (FASB), the organization charged with defining the standards for financial accounting for American business. Issued to respond to perceived abuses in “off-balance-sheet financing” (prior to FAS 13, lease commitments did not appear on a company’s balance sheet), it set out criteria for determining whether a lease was just a rental (operating lease) or a form of purchase (capital lease), and laid out proper accounting and disclosure for each type.
The International Accounting Standards Board (IASB) issued its own standard for lease accounting, IAS 17, in 1982. It was largely similar to FAS 13, but replaced the “bright line” tests to distinguish capital (called finance) from operating leases with “principles-based” tests. In practice, almost all leases are classified the same way under either FAS 13 or IAS 17; once classified, the accounting is virtually identical. For more information on how to use EZLease with IAS 17, please follow this link.
In 2016, the FASB and IASB completed a joint project to revise the lease accounting standard. The driving force behind the project was a conclusion that operating leases as well as capital leases should be recognized on the lessee’s balance sheet, rather than merely in the footnote disclosures. While the intent of the project had been to have a converged standard that would be identical for both systems, in the end the boards reached different conclusions about the proper treatment of leases that are considered operating under FAS 13/IAS 17. The IASB decided that all leases should be considered finance leases, with expenses recognized as depreciation and interest; the FASB decided to keep the finance/operating lease distinction and to recognize expenses on operating leases generally in a straight-line manner over the lease term.
In 2017, the Governmental Accounting Standards Board (GASB) released Statement No. 87, Leases, taking the work the FASB and IASB had done in generating ASC 842 and IFRS 16 and applying it to the governmental world. Implementation is required for fiscal years starting after Dec. 15, 2020. GASB 87 generally uses the same definitions (of a lease, rent, variable payments, etc.) as ASC 842 and IFRS 16. Like IFRS 16, it requires all lessee leases (except short-term leases) to be treated as finance leases. Disclosure requirements are somewhat different than either of the other two standards. Implementation is to be accomplished retroactively to the start of the first comparable period presented in financial statements "if practicable;" if management deems it not practicable, implementation can be done as of the effective date, but reasons for not doing it retroactively must be disclosed. (Prior to implementation of GASB 87, governments use FAS 13 for lease accounting.)
Throughout the help pages, sections referring to the original lease accounting standard are labeled FAS 13 (this standard is also known as Topic 840 in the Accounting Standards Codification [ASC], which is now the official source of accounting standards for U.S. GAAP). Sections that are specific to the old IASB lease accounting standard are labeled IAS 17. Sections for the new lease accounting standards are labeled ASC 842, IFRS 16, or GASB 87 for U.S., IFRS, and U.S. government standards, respectively.
Passages in quotation marks are taken directly from the relevant standards texts, with the source shown in brackets. A reference with a paragraph number only is taken from FAS 13, as amended (based on the 1990 codification). If another FAS lease accounting standard is referenced, its number is shown with its paragraph number in brackets. (The passages may also be found in the FASB Accounting Standards Classification [ASC] Topic 840.) U.S. GAAP under the new lease accounting standard is referenced according to the ASC numbering system; the new standard is Topic 842, so all references are in the form [842-nn-nn-nn]. IFRS and IAS standard references list the standard name and paragraph number. Terms shown in bold are defined in the glossary. (FASB text is copyrighted by the FASB, and GASB text is copyrighted by the GASB, and reprinted with permission. For copies, contact the FASB or GASB. )
The conceptual basis for lease accounting is that “a lease that transfers substantially all of the benefits and risks incident to the ownership of property should be accounted for as the acquisition of an asset and the incurrence of an obligation by the lessee.” [¶7] These are called capital leases. This name is changed to finance lease in ASC 842 and GASB 87; it has always had that name in IFRS accounting. Leases that do not reach this level (operating leases) are not recorded on the balance sheet, but a footnote to the financial statements must disclose the future rental payment commitments that a company has entered into. In ASC 842, operating leases do go on the balance sheet, but are reported separately from finance leases and expenses are recognized evenly over the life of the lease, rather than the front-loaded expense profile of finance leases. This is in keeping with the revised concept that “all leases create an asset and a liability for the lessee in accordance with FASB Concepts Statement No. 6, Elements of Financial Statements” [Accounting Standards Update 2016-02, Summary].
The IASB and GASB decided to treat virtually all leases as finance leases. IFRS 16 permits operating-type accounting for leases of "low value" assets. IFRS 16, ASC 842, and GASB 87 permit old-style operating accounting for leases with a lease term of 12 months or less. In determining the lease term to decide if a lease qualifies for short-term status, ASC 842 includes only options that are reasonably certain of being exercised (and thus are part of the required lease term when the lease is accounted for); IFRS 16 and GASB 87 require including all options.
ASC 842 and IFRS 16 have an effective date of 2019, with the potential to restate prior years when implemented. GASB 87 takes effect in 2020. This manual describes both the existing standard (primarily FAS 13) and the new standards (ASC 842/IFRS 16/GASB 87).
Lease accounting starts with determining whether a lease is capital or operating. To do so, you need to know: