The path of LEASE resistance  

It always amazes me the infinite possibilities that we encounter every day. Each decision results in new opportunities and challenges. Minor decisions that we think little of could have significant implications. When setting off on any journey, it is important to plan out your path and try to mitigate obstacles, so you do not lose your way. Yogi Berra put it well when he said, “You’ve got to be very careful if you don’t know where you are going, because you might not get there.”  

As you have likely heard, lease accounting under U.S. Generally Accepted Accounting Principles (U.S. GAAP) has changed for private companies for fiscal years beginning after December 15, 2021. For most entities, this will be their calendar 2022-year ends.   

Prior to the recent lease accounting pronouncement, U.S. GAAP only required leases classified as capital leases (now financing) to be recognized on the balance sheet. For leases classified as operating leases, payments were reflected in the financial statements as rent expense on the income statement and the lease commitments were included in the disclosures of the financial statements.  

The core principle of the recent lease accounting pronouncement is that all leases (with minimal exceptions for certain leases) create an asset and a liability for the lessee. A lessee should recognize a liability to make lease payments (the lease liability) on the balance sheet and a right-of-use asset representing its right to use the underlying asset for the lease term.  

In our upcoming lease series, some of the finer points and considerations associated with lease accounting such as policy elections, lease population, practical expedients, related party leases, leasehold improvements, lease term, discount rates, embedded leases, and other matters will be covered. 

The goal is to provide helpful hints and considerations as you start your lease accounting journey. As always, you do not have to walk this path alone. Sometimes a guide who knows the nuances of the new lease standard can make your journey more successful as noted in the below testimonial from one of our clients.  

In October 2021, The Dutra Group hired CLA to assist with the analysis of its operational leases, in preparation for 2022 changes to accounting rules governing balance sheet liabilities. Michael Westervelt and his team were incredibly responsive. Early planning and preparation were key to compliance, and CLA was critical in reducing the stress of adoption.  

Kevin Mohr, CFO The Dutra Group  

The considerations involved with the new lease standard can be complex. We are thankful for our clients and look forward to the opportunity to help!