Non-Profit

Changes in Lease Accounting Standards: What Nonprofits Should Know.

In 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update 2016-02, known as ASC 842, to provide new guidance on leasing standards and supersede previous guidance under ASC 840.

Earlier guidance for lease accounting allowed organizations to omit certain lease assets and liabilities from their balance sheet, which could be misleading, especially when the operating lease activities are significant. ASC 842 was designed to close the loophole of off-balance sheet operating leases, providing a more transparent picture of a company’s financial health to lenders and investors.

After multiple delays, the new standard is taking effect for private companies and nonprofits for fiscal years beginning after December 15, 2021 and interim periods within fiscal years beginning after December 15, 2022. Early adoption is permitted.

Under the new standard, the definition of a lease is: a contract, or part of a contract, that conveys the right of control and the use of identified property, plant, and equipment (an identified asset) for a period of time in exchange for consideration.

Practical Consideration: Donated space along with the portions of a contract that include goods and services are not included in the definition of a lease under this new standard.

How can organizations prepare?

There are several ways that nonprofits can prepare for this change to lease accounting:

  • Review leases – establish a clear understanding of all existing lease commitments, including embedded leases or leases that are part of a larger agreement such as a service or maintenance contract.
  • Create processes and procedures – establish a clear process for collecting lease data and procedure for tracking lease activity to ensure compliance.
  • Develop a communication plan – stakeholders should be kept well-informed of any potential changes to the balance sheet to ensure transparency and avoid confusion.

Lease agreements are frequently arranged by departments outside of finance and accounting. Organization-wide cooperation is critical, and it’s essential that nonprofits start planning now.

The impact on the financial statements

The following chart summarizes the impact on the financial statements under the new standard.

OLD STANDARD
NEW STANDARD
Operating LeasesBalance SheetN/ARecognize Right-of-Use (ROU) asset and lease liability measured at present value
Income StatementsRent charged to expenseRecognize lease payments as expense on a straight-line basis
DisclosuresLimited qualitative and quantitative disclosuresExpanded qualitative and quantitative disclosures
TermsOperating leasesOperating leases (no change)
Capital LeasesBalance SheetRecognize asset and liabilityRecognize asset and liability (new terminology)
Income StatementsInterest expenseInterest expense
Depreciation expenseAmortization expense
DisclosuresLimited qualitative and quantitative disclosuresExpanded qualitative and quantitative disclosures
TermsCapital leasesFinance leases

Since 1974, our trusted advisors have partnered with nonprofit organizations to navigate every step of the financial journey. At Dugan & Lopatka, our CPAs and consultants are always on the cutting edge of changes in the nonprofit sector. We understand the challenges you face—the special accounting, auditing and reporting requirements of your organization—and we use our deep expertise to deliver exceptional service tailored to your needs.  

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