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 |