Lease

Classification criteria

Under current U.S. GAAP, if the beginning of the lease term occurs within the last 25 percent of the leased property’s total estimated economic life, an entity is not required to evaluate the lease classification criteria related to (1) the lease term in relation to the property’s estimated economic life (the 75 percent test) and (2) the present value of the minimum lease payments in relation to the fair value of the leased property (the 90 percent test). In a previous decision, the FASB had tentatively agreed that under the new leasing guidance, lease classification would be evaluated in accordance with criteria similar to those in IAS 17, Leases, which does not include a similar exception.

The FASB has received feedback indicating that the consequence of not retaining this exception is that leases that begin near the end of an asset’s useful life that otherwise should be classified as operating leases may be classified as finance leases. In response to this concern, the FASB tentatively decided that the final standard will include an exemption from the “lease term is for the major part of the remaining economic life of the underlying asset” classification criterion for leases that begin near the end of the underlying asset’s economic life.

Effective date

For public business entities (PBEs), the new leases standard would be effective for annual periods beginning after December 15, 2018 (i.e., calendar periods beginning on January 1, 2019), and interim periods therein. For all other entities, the standard would be effective for annual periods beginning after December 15, 2019 (i.e., calendar periods beginning on January 1, 2020), and interim periods thereafter. Early adoption would be permitted for all entities. Further, an entity’s ability to early adopt the leases standard would not be linked to its adoption of any of the FASB’s other standards.

For more information, see Deloitte’s related journal entry as well as the press release and tentative Board decisions on the FASB’s website.

Classification and measurement

Effective date

For PBEs, the new standard would be effective for fiscal years beginning after December 15, 2017, including interim periods therein. For all other entities, including not-for-profit entities and employee benefit plans within the scope of ASC 960 through ASC 965 on plan accounting, the effective date would be in line with the recommendation of the private-company decision-making framework — that is, fiscal years beginning one year after the effective date for PBEs (i.e., December 15, 2018) and interim reporting periods within fiscal years beginning two years after the PBE effective date (i.e., December 15, 2019).

Early adoption would be permitted for all entities, but only with respect to the following changes made to ASC 825:

• For financial liabilities measured under the fair value option, fair value changes resulting from an entity’s own credit would be recognized through other comprehensive income.
• The fair value disclosure requirements for financial instruments not recognized at fair value would be eliminated for non-PBEs.

Non-PBEs may elect to early adopt all the provisions of the final standard once the standard becomes effective for PBEs.

For more information, see Deloitte’s related journal entry as well as the press release and tentative Board decisions on the FASB’s website. In addition, see Deloitte’s February 2, 2015, Heads Up, which outlines key differences between the FASB’s approach and the approach in IFRS 9.