Under the new lease accounting standards, ASC 842 and IFRS 16, the way companies define leases changes. Most leases are no longer referenced in footnotes, but reported on the balance sheet. Under ASC 842, leases still need to be classified as operating or finance. In many instances, lease identification will remain unchanged from the previous standards. However, the new lease definition does change the identification of some leases.
Major challenges of the new lease accounting standards
1. Does a contract contain an embedded lease? Is there an identified asset in the contract? Who controls the asset? Is the asset substitutable? Who gets the economic benefits from use of the asset?
2. How are sale leaseback and built-to-suit transactions accounted for differently? What are the requirements to determine if a sale has been completed? How is control of the asset determined?
3. Do the assets meet one of the exceptions under IFRS 16: Are they less than or equal to 12 months in term or less than or equal to $5000 in value? What about the exception under ASC 842: Less than or equal to 12 months in term?