Financial Accounting Standards Board (FASB) were introduced in 2016 to replace the Generally Accepted Accounting Principles (GAAP) on accounting for lease. The main emphasis of the new rules is the recognition of the lease assets and liabilities by the occupiers. According to the Accounting Standards Codification, a Lease is a contract that outlines one’s right to use a property or plant for a specific period. The law applies to all accepts the lease to explore, intangible assets, lease of biological assets, inventory, and asset under construction. Basically, all the components of the lease are supposed to be recognized at the beginning of the agreement.
A lease can be categorized during a commencement based on the transfer of the lease ownership at the end of the contract, the lease grant to purchase the asset after the expiry of the contract, and the lease terms of the remaining economic life of the underlying assets. The reassessment of the contract is necessary when there are modifications but they are not accounted for in a separate account. Also, when there is a change in lease terms. Premeasurements of the assets takes place when there are changes in lease terms, the change in the number of residual guarantees the probability of being owned, and the change in the variable lease payments that previously failed to meet the definition of the lease payment.
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The standards are considered to function in the same way as the GAAP except for a few improvements that have been incorporated to enhance efficacy. When transiting from the old to the new system, a cross-functional team is essential for determining the possibility of violating the existing debt covenant as well as the ability of the organization to comply with the law. It is easy to use especially for those that had used the GAAP.
