In February 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2016-02, Leases, which provides new guidelines that change the accounting for leasing arrangements. To be able to properly account for leases, financial professionals must understand Accounting Standards Update (ASU) 2016-02 (also referred to as Topic 842). This guidance covers information on how leases should be accounted for. Prior to the update, the previous leasing standard (ASC 840) had been in existence for almost 40 years.

The purpose of the new standard is to close a major accounting loophole in ASC 840 that dealt with off-balance sheet operating leases. The core principle of the new standard (Topic 842) is as follows: (i)A lessee should recognize the assets and liabilities that arise from leases. The FASB wanted to address off-balance sheet concerns related to lessees operating leases.

This requirement, compared with legacy lease accounting, primarily changes the accounting for lessees, requiring lessees to record assets and liabilities on the balance sheet for almost every lease. This significantly differs from legacy accounting for operating leases, under which they were viewed as executory contracts not recognized for accounting purposes - in other words, they were off balance sheet.

Since the issuance of ASU 2016-02 more than five years ago, the FASB has released various ASUs to provide additional transition relief and make technical corrections and improvements to the standard.

During a public Board meeting in April 2021, the FASB staff noted that the lease modification guidance in ASC 840 and ASC 842 contemplates routine changes in terms and conditions of lease contracts negotiated between lessees and lessors, but not changes rapidly executed on a global scale that arise as a result of the COVID-19 pandemic. Accordingly, the FASB staff stated that for concessions related to the pandemic, an entity could decide not to analyze each lease contract to determine whether enforceable rights and obligations for concessions exist. Instead, an entity can elect to not apply the lease modification guidance in ASC 842 or ASC 840 to those contracts and to account for lease concessions related to the effects of the COVID-19 pandemic as though those concessions arise from the enforceable rights and obligations of the existing contract (regardless of whether those concessions explicitly exist in the contract). The election can be made for concessions if the total cash flows required by the modified contract remain substantially the same or are less than the total cash flows before the concession. The FASB staff expects that reasonable judgment will be applied in that determination.

Most recently, the FASB issued ASU 2021-05, which changed the accounting for lessors of leases with variable payments that do not depend on an index or rate. This new guidance requires a lessor to classify a lease with any variable lease payments as an operating lease at lease commencement if both of the following conditions are met:

  1. The lease would have been classified as a sales-type lease or direct financing lease in accordance with the classification criteria in ASC 842-10-25-2 and 25-3, respectively.
  2. The lessor would have recognized a selling loss at lease commencement.

This amendment was designed to eliminate the possibility that an economically profitable arrangement would lead the lessor to recognize a loss at lease inception as a result of the ASC 842 measurement requirements for variable lease payments that are not based on an index or rate.

The course covers elements of lease classification for both lessees and lessors.

Learning Objectives
  • Explore and understand the updated Accounting Standards Codification Topic 842, Leases.
  • Identify the types and classifications of leases for lessees and lessors.
  • Identify how to account for a lessee’s operating and capital leases and required disclosures.
  • Identify how to account for a lessor’s operating, direct financing, and sales-type leases and required disclosures.
  • Discover and understand sale and leaseback issues.
Last updated/reviewed: March 27, 2024
11 Reviews (28 ratings)

Reviews

5
Anonymous Author
This course provides a very good logical organized document that can be used to quickly review types of leases and handling. It is clear and concise.

5
Anonymous Author
Really good reference document. I will print and refer to it during my day to day at work. It is complete and detailed with examples. Thank you.

4
Anonymous Author
Good overview since most private companies have to do this now. It would be nice to have the lecture to listen to with real world examples

5
Anonymous Author
Very effective text based training - goes into detail about how a lessee and a lessor should account for each type of lease arrangement

5
Anonymous Author
This is a great course with challenging test questions that result in a solid understanding of the subject matter.

5
Anonymous Author
I wish there was a video lecture associated with this instead of just a PDF. Not easy concepts to read.

5
Anonymous Author
Thorough & detailed content. Final exam was challenging but fair and ensured I understood the material.

5
Anonymous Author
Clear materials that relate to the final exam. Written in plain English and easy to understand.

5
Anonymous Author
This was a very good course. Very thorough and covers the major topics on ASC 842.

4
Anonymous Author
Good way to summarize the new standards. Great summary to download and hold onto.

5
Anonymous Author
The course provided a good overview of the lease standard.

Prerequisites
Course Complexity: Foundational
No advanced preparation or prerequisites are required for this course.
Education Provider Information
Company: Illumeo, Inc., 75 East Santa Clara St., Suite 1215, San Jose, CA 95113
Contact: For more information regarding this course, including complaint and cancellation policies, please contact our offices at (408) 400- 3993 or send an e-mail to .
Instructor for this course
Course Syllabus
COURSE MATERIAL
  Primer on Accounting for Leases (Text Based Course)PDF
REVIEW AND TEST
  REVIEW QUESTIONSquiz
 FINAL EXAMexam