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 new lease accounting standard change:
- 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 Leases | Balance Sheet | N/A | Recognize Right-of-Use (ROU) asset and lease liability measured at present value |
| Income Statements | Rent charged to expense | Recognize lease payments as expense on a straight-line basis | |
| Disclosures | Limited qualitative and quantitative disclosures | Expanded qualitative and quantitative disclosures | |
| Terms | Operating leases | Operating leases (no change) | |
| Capital Leases | Balance Sheet | Recognize asset and liability | Recognize asset and liability (new terminology) |
| Income Statements | Interest expense | Interest expense | |
| Depreciation expense | Amortization expense | ||
| Disclosures | Limited qualitative and quantitative disclosures | Expanded qualitative and quantitative disclosures | |
| Terms | Capital leases | Finance leases | |
Since 1974, our trusted advisors have partnered with nonprofit organizations to navigate every step of the financial journey, including nonprofit lease accounting rules and lease accounting standard changes. 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.