According to the AICPA, there has been widespread concern that the current nature of lease expense is not being accounted for in a way that truly represents the economics behind lease transactions.

On November 11, 2015, the Financial Accounting Standards Board (FASB) finalized a standard for the accounting of lease expenses. On January 12, 2016, the international accounting standards board issued its version for the change to accounting for leases requiring leases to be reported on the balance sheet either as an asset or a liability.

Here is a classic example we see with many of our clients:

Tucson Corporation leases its central office building from Phoenix Company. Tucson signs a five year lease agreement (beginning 1/1/2016, ending 12/31/2020). See below for monthly payment detail from the lease contract.

 

YEAR	MONTHLY PAYMENT
2016	$1,000
2017	$1,500
2018	$2,000
2019	$2,500
2020	$3,000

According to new standards, Tucson Corp. is expected to do the following for 2016 accounting (see table below). Tucson will book Lease expense of $24,000 (cells D2-D13), rather than the cash paid of $12,000 (cells C2-C13). Tucson will determine how much total cash payment will be expended over the five year life of the lease (60 months), which is $120,000 total (cell C62). They will then take the $120,000 and divide it by 60 months which equals $2,000. This is your “GAAP Expense” (cell C64). Tucson will subtract GAAP Expense from Cash payment to determine a payable or an asset (column E). The payable or asset will zero out by 12/31/2020 (cell E62).

For the example of what to book for 2016, Tucson will record total cash payment of $12,000 (cells C2-C13), and they will also record an “Accrued Lease Payable” on the balance sheet of $12,000 (cell F13). This accrued lease payable (or asset) is the new account introduced to the balance sheet.

For the example of what to book for 2018, Tucson will record total cash payment of $24,000 ($2,000 per month for 12 months, cells C26-C37), lease expense of $24,000 (cells D26-D27), and accrued lease liability of $18,000 (cell F37).

	A	B	C	D	E	F
1	MONTH	YEAR	CASH PAYMENT	GAAP EXPENSE	(PAYABLE) ASSET	ACCRUED
2	January	2016	1,000.00	2,000.00	(1,000.00)	(1,000.00)
3	February	2016	1,000.00	2,000.00	(1,000.00)	(2,000.00)
4	March	2016	1,000.00	2,000.00	(1,000.00)	(3,000.00)
5	April	2016	1,000.00	2,000.00	(1,000.00)	(4,000.00)
6	May	2016	1,000.00	2,000.00	(1,000.00)	(5,000.00)
7	June	2016	1,000.00	2,000.00	(1,000.00)	(6,000.00)
8	July	2016	1,000.00	2,000.00	(1,000.00)	(7,000.00)
9	August	2016	1,000.00	2,000.00	(1,000.00)	(8,000.00)
10	September	2016	1,000.00	2,000.00	(1,000.00)	(9,000.00)
11	October	2016	1,000.00	2,000.00	(1,000.00)	(10,000.00)
12	November	2016	1,000.00	2,000.00	(1,000.00)	(11,000.00)
13	December	2016	1,000.00	2,000.00	(1,000.00)	(12,000.00)
14	January	2017	1,500.00	2,000.00	(500.00)	(12,500.00)
15	February	2017	1,500.00	2,000.00	(500.00)	(13,000.00)
16	March	2017	1,500.00	2,000.00	(500.00)	(13,500.00)
17	April	2017	1,500.00	2,000.00	(500.00)	(14,000.00)
18	May	2017	1,500.00	2,000.00	(500.00)	(14,500.00)
19	June	2017	1,500.00	2,000.00	(500.00)	(15,000.00)
20	July	2017	1,500.00	2,000.00	(500.00)	(15,500.00)
21	August	2017	1,500.00	2,000.00	(500.00)	(16,000.00)
22	September	2017	1,500.00	2,000.00	(500.00)	(16,500.00)
23	October	2017	1,500.00	2,000.00	(500.00)	(17,000.00)
24	November	2017	1,500.00	2,000.00	(500.00)	(17,500.00)
25	December	2017	1,500.00	2,000.00	(500.00)	(18,000.00)
26	January	2018	2,000.00	2,000.00	–	(18,000.00)
27	February	2018	2,000.00	2,000.00	–	(18,000.00)
28	March	2018	2,000.00	2,000.00	–	(18,000.00)
29	April	2018	2,000.00	2,000.00	–	(18,000.00)
30	May	2018	2,000.00	2,000.00	–	(18,000.00)
31	June	2018	2,000.00	2,000.00	–	(18,000.00)
32	July	2018	2,000.00	2,000.00	–	(18,000.00)
33	August	2018	2,000.00	2,000.00	–	(18,000.00)
34	September	2018	2,000.00	2,000.00	–	(18,000.00)
35	October	2018	2,000.00	2,000.00	–	(18,000.00)
36	November	2018	2,000.00	2,000.00	–	(18,000.00)
37	December	2018	2,000.00	2,000.00	–	(18,000.00)
38	January	2019	2,500.00	2,000.00	500.00	(17,500.00)
39	February	2019	2,500.00	2,000.00	500.00	(17,000.00)
40	March	2019	2,500.00	2,000.00	500.00	(16,500.00)
41	April	2019	2,500.00	2,000.00	500.00	(16,000.00)
42	May	2019	2,500.00	2,000.00	500.00	(15,500.00)
43	June	2019	2,500.00	2,000.00	500.00	(15,000.00)
44	July	2019	2,500.00	2,000.00	500.00	(14,500.00)
45	August	2019	2,500.00	2,000.00	500.00	(14,000.00)
46	September	2019	2,500.00	2,000.00	500.00	(13,500.00)
47	October	2019	2,500.00	2,000.00	500.00	(13,000.00)
48	November	2019	2,500.00	2,000.00	500.00	(12,500.00)
49	December	2019	2,500.00	2,000.00	500.00	(12,000.00)
50	January	2020	3,000.00	2,000.00	1,000.00	(11,000.00)
51	February	2020	3,000.00	2,000.00	1,000.00	(10,000.00)
52	March	2020	3,000.00	2,000.00	1,000.00	(9,000.00)
53	April	2020	3,000.00	2,000.00	1,000.00	(8,000.00)
54	May	2020	3,000.00	2,000.00	1,000.00	(7,000.00)
55	June	2020	3,000.00	2,000.00	1,000.00	(6,000.00)
56	July	2020	3,000.00	2,000.00	1,000.00	(5,000.00)
57	August	2020	3,000.00	2,000.00	1,000.00	(4,000.00)
58	September	2020	3,000.00	2,000.00	1,000.00	(3,000.00)
59	October	2020	3,000.00	2,000.00	1,000.00	(2,000.00)
60	November	2020	3,000.00	2,000.00	1,000.00	(1,000.00)
61	December	2020	3,000.00	2,000.00	1,000.00	–
62	Total Cash Payment		120,000.00	120,000.00	–
63	Total Months		60
64	GAAP Expense		2,000.00

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