Understanding the New Lease Guidance

General Business

January 09, 2017
by Travis Richert, CPA

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Travis Richert Travis Richert, CPA
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In February 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2016-02 Leases (Topic 842). Topic 842 defines a lease as “a contract, or part of a contract, that conveys the right to control the use of identified property, plant, or equipment (an identified asset) for a period of time in exchange for consideration.” Users of financial statements have criticized the fact that previous GAAP did not provide the full representation of operating lease transactions, which led to the FASB issuing this new standard. The key principle of Topic 842 is that lessees should recognize the asset and liability that arises from a lease. The asset that is recognized is termed a right-of-use (ROU) asset, and the corresponding liability represents the future lease payments. 

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