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New Accounting Standard for Leases to Take Effect in 2022

Posted by Admin Posted on Aug 24 2021


After years of discussion, in 2016 the Financial Accounting Standards Board issued Accounting Standards Update 2016-02, Leases (Topic 842), which makes sweeping changes to lease accounting standards.  The impact on many balance sheets will be significant, and the logistics of implementing the standard will be challenging to some. 


The standard was originally to be effective for years beginning after December 15, 2019 for non-public entities and for years beginning after December 15, 2018 for public entities, with early application permitted.  However, ASU 2019-10 delayed the date for non-public entities to years beginning after December 15, 2000, and then ASU 2020-05 further delayed it to years beginning after December 15, 2021 (i.e., calendar 2022).  So this will have to be implemented beginning with calendar 2022 entities. 


The standard applies to all entities – businesses and nonprofits - that issue financial statements in accordance with U.S. generally accepted accounting principles (GAAP).  It will not apply to entities that use the cash basis of accounting or other non-GAAP accounting frameworks. 


What is the Biggest Change?


This biggest change is that lessees must recognize on their balance sheets/statements of financial position the value of leased assets and lease liabilities for essentially all leases, whether operating or capital/finance.  Under current GAAP, such assets and liabilities are recorded only for capital (now called finance) leases.  Consequently, the change for lessees will be to gross-up assets and liabilities for operating leases.


There will be no change to lessee income statements/statements of activities.


This change will negatively affect balance sheet ratios, particularly current and debt-equity ratios, since both assets and liabilities will be grossed-up, and the change may be significant.  Because many loan agreements contain covenants governing these ratios, affected lessees should consider the effects of the new standard and discuss this with their lenders well before 2022.


What Does the Standard Say (Briefly)?

 Lessees must record an asset and a liability for the net present value of future lease payments when a lease commences for both finance leases and operating leases.  The leased assets (right-of-use assets) and lease liabilities will be written down over the lease term.  Only the balance sheet will be affected; there will be no change to income statements. 

Classification of Leases


Leases are to be classified into one of two types-


Group A leases meet any one of the following five criteria (pretty much the same criteria for capital leases under current GAAP)-

1.      The lease transfers ownership by the end of the lease.

2.      The lease contains a purchase option that is reasonably certain to be exercised.

3.      The lease term is for a “major part” of the economic life of the asset (although Topic 842 does not contain the bright-line test of Topic 840, it does suggest that the same 75% threshold of the remaining economic life is a “major part”).  However, this criterion does not apply if the lease commences near the end of the asset’s economic life, defined as the last 25%.

4.      The present value of lease payments, plus any residual value guaranteed by the lessee, equals or exceeds “substantially” all the fair value of the asset (although Topic 842 does not contain the bright-line test of Topic 840, it does suggest that the same 90% present value threshold as “substantially” all the fair value).  In making this determination, the discount rate should be 1) the rate implicit in the lease if readily determinable, or 2) the lessee’s incremental borrowing rate, if not.  Nonpublic entities can make an accounting election to use a risk-free rate instead.  However, making this election will most likely increase the net present value, making qualifying as a Group A lease more likely. 

5.      The asset is so specialized that it is expected to have no use to the lessor at the end of the lease.


A Group A lease is classified as a finance lease by the lessee (same as capital lease under current GAAP) and as a sale-type lease by the lessor.


Group B leases apply to lessors only and only when none of the Group A criteria is met-

1.      The present value of the sum of the lease payments and any residual value guaranteed by the lessee and/or any other third party unrelated to the lessor equals or exceeds substantially all of the fair value of the underlying asset, and,

2.      It is probable that the lessor will collect the lease payments plus any amount necessary to satisfy a residual value guarantee.

 A Group B lease is classified as a direct financing lease by the lessor.  If the lease is neither a Group A nor Group B lease, it is classified as an operating lease by the lessor.


SBA Releases Rules on Second Draw Paycheck Protection Program Loans

Posted by Admin Posted on Jan 19 2021

Most banks are now accepting applications for first and second draw PPP loans. 

The SBA released on January 19 an 18-page document containing the rules for second draw PPP loans, including guidance on how to calculate revenue reduction and maximum loan amounts and the documentation requirements for applications.  

The document is located at


SBA Issues Guidance on Round Two of PPP Loans

Posted by Admin Posted on Jan 08 2021

The SBA has issued two sets of Interim Final Rules for the second round of PPP lending – one for second-time borrowers, and one for first-time borrowers.  The SBA will begin taking applications on January 11, although most banks will not open up applications until around January 15.  Both types of borrower have until March 31 to apply.

 Second-Time Borrower Rules-

1.      Must generally have 300 or fewer employees.

2.      Must have experienced at a least a 25% decline in gross receipts in any quarter in 2020 compared to the comparable quarter in 2019.

·         Appears to be based on calendar quarters.

·         Gross receipts include all revenue in whatever form received or accrued, in accordance with the entity’s accounting method, but excludes PPP funds and Emergency Injury Disaster Loans.

 ·         Borrowers in operation in all four quarters of 2019 can elect to compare total annual 2020 receipts to total 2019 receipts rather than doing quarter-by-quarter calculations.  For loans over $150,000, must submit documentation of revenue decline, but not for loans of $150,000 or less.

 3.      Had to have used, or will use, entire amount of first draw funds.

4.      Loan amount will be based on 2.5 times average monthly payroll costs (3.5 for restaurants and hotels), up to $2 million ($4 million total for a corporate group).  Can use as the payroll base 2019, 2020, or the 12 months prior to application.

·         No documentation required for payroll costs if 2019 payroll used for both first and second draw and the lender is the same.

 5.      Borrower can choose a “covered period” that is anywhere between 8 and 24 weeks.

6.      Will use SBA Form 2483-SC, Paycheck Protection Program Second Draw Borrower Application Form, to apply to lender.

First-Time Borrower Rules

 1.      Must generally have 500 or fewer employees.

 2.      Added Section 501(c)(6) organizations (trade associations, chambers of commerce) as eligible borrowers.

 Forgiveness Provisions – Both Types of Borrowers

 1.      Same costs as before are eligible for forgiveness (payroll, mortgage interest, rent, and utilities, with the following additions-

·         Payroll costs clarified to include group life, disability, vision, and dental.

·         Personal protection expenditures (PPE) to comply with COVID-19 federal health and safety guidelines.

·         Supplier costs that are essential to operations.

·         Property damage costs relating to 2020 public disturbances.

 2.      Same 60/40 split between payroll and non-payroll maintained for both 1st and 2nd draws.

 3.      Simplified forgiveness for loans of $150,000 or less with a one-page form.


4.      EIDL advances no longer will reduce forgiveness.


Other Provisions

 1.      $25 billion set aside for borrowers with 10 or fewer employees or for loans of under $250,000 in low-income areas.

 2.      SBA will accept applications only from community financial institutions for at least the first two days after loan portal re-opens.

 3.      Tax deductibility of PPP expenses reiterated. 

The Consolidated Appropriations Act, 2021 Part II-Business and Employer Provisions

Posted by Admin Posted on Dec 28 2020

Tax Deductibility of Paycheck Protection Program (PPP) Loan-Related Expenses

The Act overrides Revenue Ruling 2020-27 and allows full tax deductibility of expenses incurred to generate forgiveness of PPP loans.  Consequently, loan forgiveness is not taxable and the related expenses are tax deductible (or added to basis, if applicable).

 The Act also clarifies that forgiveness of Economic Injury Disaster Loans (EIDL) and grants are not taxable and that related expenses are tax deductible.

 50% Limit on Business Meal Deduction Suspended for Meals Provided by Restaurants in 2021 and 2022

Under the Act, the 50% limit won't apply to expenses for food or beverages provided by a restaurant that are paid or incurred after Dec. 31, 2020 and before Jan. 1, 2023.

Energy Efficient Commercial Buildings Deduction

 Under pre-Act law, for property placed into service before Jan. 2021, taxpayers could claim a deduction for energy efficiency improvements to lighting, heating, cooling, ventilation, and hot water systems of commercial buildings, including a $1.80 deduction per square foot for construction on qualified property.  A partial $0.60 deduction per square foot is allowed if certain subsystems meet energy standards but the entire building does not, including the interior lighting systems, the heating, cooling, ventilation, and hot water systems, and the building envelope.

 The Act makes this deduction permanent.

Employer Credit for Paid Family and Medical Leave

 Under pre-Act law, for tax years beginning before Jan. 1, 2021, the Code provides an employer credit for paid family and medical leave, which permits eligible employers to claim an elective general business credit based on eligible wages paid to qualifying employees with respect to family and medical leave.  The credit is equal to 12.5% of eligible wages if the rate of payment is 50% of such wages and is increased by 0.25 percentage points (but not above 25%) for each percentage point that the rate of payment exceeds 50%.  The maximum amount of family and medical leave that may be taken into account with respect to any qualifying employee is 12 weeks per tax year.

 The Act extends this credit through 2025, applying to wages paid in tax years beginning after Dec. 31, 2020.

Extension of Payroll Tax Credits

The Act extends the refundable payroll tax credits for paid sick and family leave enacted in the Families First Coronavirus Response Act through the end of March 2021.  It also modifies the payroll tax credits so that they apply as if the corresponding employer mandates were extended through March 31, 2021.  The bill also allows individuals to elect to use their average daily self-employment income from 2019 rather than 2020 to compute the credit.

 Employee Retention Tax Credit Modifications

The Act extends the CARES Act employee retention tax credit (ERTC) through June 30, 2021.  It also expands the ERTC and contains technical corrections.  The expansions of the credit include:

  • An increase in the credit rate from 50% to 70% of qualified wages;
  • An increase in the limit on per employee creditable wages from $10,000 for the year to $10,000 for each quarter;
  • A reduction in the required year-over-year gross receipts decline from 50% to 20%;
  • A safe harbor allowing employers to use prior-quarter gross receipts to determine eligibility;
  • A provision to allow certain governmental employers to claim the credit;
  • An increase from 100 to 500 in the number of employees counted when determining the relevant qualified wage base; and
  • Rules allowing new employers who were not in existence for all or part of 2019 to be able to claim the credit.

The Act also (retroactive to the effective date of the CARES Act):

  • Provides that employers who receive PPP loans may still qualify for the ERTC with respect to wages that are not paid with forgiven PPP proceeds;
  • Clarifies the determination of gross receipts for certain tax-exempt organizations; and
  • Clarifies that group health plan expenses can be considered qualified wages even when no other wages are paid to the employee, consistent with IRS guidance.

PPP 2.0

 ·         The Act allows for a second round of PPP funds for entities with 300 or fewer employees and who had a revenue decline of 25% or more in any 2020 quarter compared to 2019.

 ·         The Acts expands the list of eligible entities, which will include section 501(c)(6) organizations.

 ·         Expands the list of eligible expenses.

 ·         Provides for a simplified forgiveness process for PPP loans of $150,000 or less.

 ·         Retroactively repeals the provision require that and EIDL advances be deducted from PPP forgiveness.

The Consolidated Appropriations Act, 2021 Part I-Individual Provisions

Posted by Admin Posted on Dec 23 2020

On December 27, 2020, the President signed into law the massive Consolidated Appropriations Act, 2021 that contains many relief and tax provisions.  A summary of the more signficant changes affecting individual taxpayers follows.

Additional 2020 Recovery Rebates

 Provides a refundable advance tax credit to “eligible individuals” of $600 per taxpayer ($1,200 for married filing jointly), in addition to $600 per qualifying child.  The credit phases out starting at $75,000 of modified adjusted gross income ($112,500 for heads of household and $150,000 for married filing jointly) at a rate of $5 per $100 of additional income. 

 The term "eligible individual" does not include any nonresident alien, anyone who qualifies as another person's dependent, and estates or trusts.

 Taxpayers receiving an advance payment that exceeds the amount of their eligible credit will not be required to repay any amount of the payment.  If the amount of the credit determined on the taxpayer's 2020 tax return exceeds the amount of the advance payment, taxpayers will receive the difference as a refundable tax credit.

 $250 Educator Expense Deduction Applies to PPE

 Provides that personal protective equipment (PPE), disinfectant, and other supplies used for the prevention of the spread of COVID-19 are treated educator expenses eligible for the $250 deduction.

 Individuals May Base 2020 Refundable Child Tax Credit & Earned Income Credit on Prior Year’s Earned Income

 In determining the refundable Child Tax Credit (CTC) and the Earned Income Credit (EIC) for 2020, taxpayers may elect to substitute the earned income for the preceding tax year if that is greater than the taxpayer's earned income for 2020.

 Certain Charitable Contributions Deductible by Non-Itemizers

 For 2020, individuals who normally do not itemize deductions may take up to a $300 above-the-line deduction for cash contributions to qualified charitable organizations (deduction limits of $300 also applied to married filers).  The Act extends the above rule through 2021, allowing individual cash contributions of up to $300, ($600 for married filers) to be deducted above-the-line for cash contributions to qualified charitable organizations.

Modification of Limitations on Charitable Contributions

For 2020 and 2021, the percentage limitation rules for individuals making qualified charitable contributions, in cash, to 50% charities do not apply.

Reduction in Medical Expense Deduction Floor

Under pre-Act law, beginning in 2021, individuals could claim an itemized deduction for unreimbursed medical expenses only to the extent that such expenses exceeded 10% of Adjusted Gross Income (AGI). 

The Act makes the 2020 threshold of 7.5% of AGI threshold permanent, for tax years beginning after Dec. 31, 2020.

 Transition from Deduction for Qualified Tuition and Related Expenses to Increased Income Limitation on Lifetime Learning Credit

 The Code Sec. 25A education credit is the sum of: (i) the American Opportunity Tax Credit (AOTC) and the Lifetime Learning credit.  Under pre-Act law, different phase-out rules applied for the AOTC and the Lifetime Learning Credit.  Also under pre-Act law, Code Sec. 222 allowed a "higher education expense deduction" for qualified tuition and related expenses paid during the year.

The Act removes the different phase-out rules for the AOTC and Lifetime Learning Credit and replaces them with a single phase-out, effective for tax years beginning after Dec. 31, 2020.  The Act also repeals Code Sec. 222 for tax years beginning after Dec. 31, 2020.

 Exclusion from Gross Income of Discharge of Qualified Principal Residence Indebtedness and Reduction in Maximum Indebtedness Limits

Under pre-Act law, discharge of indebtedness income from qualified principal residence debt, up to a $2 million limit ($1 million for married individuals filing separately), was, in tax years beginning before Jan. 1, 2021, excluded from gross income.

 The Act extends this exclusion to discharges of indebtedness before Jan. 1, 2026 and reduces the above maximum acquisition indebtedness limits to $750,000 and $375,000, respectively.

Treatment of Mortgage Insurance Premiums as Qualified Residence Interest

 Under pre-Act law, mortgage insurance premiums paid or accrued before Jan. 1, 2021 by a taxpayer in connection with acquisition indebtedness with respect to the taxpayer's qualified residence were treated as deductible qualified residence interest, subject to a phase-out based on the taxpayer's adjusted gross income (AGI).  The amount allowable as a deduction was phased out ratably by 10% for each $1,000 by which the taxpayer's adjusted gross income exceeded $100,000 ($500 and $50,000, respectively, in the case of a married individual filing a separate return).  Thus, the deduction wasn't allowed if the taxpayer's AGI exceeded $110,000 ($55,000 in the case of married individual filing a separate return).

The Act extends this treatment through 2021 for amounts paid or incurred after Dec. 31, 2020.


IRS Issues Guidance on Deferral of Social Security Tax Deferral

Posted by Admin Posted on Aug 31 2020

On August 28, the IRS issued Notice 2020-65 providing guidance about the President’s Memorandum allowing employers to defer withholding and remitting the employee share of Social Security Tax.

 Employers may – but are not required – to defer withholding the employee (but not employer) portion of Social Security tax on wages paid from September 1 to December 31, 2020, but only if such wages are less than $4,000 per employee for a bi-weekly pay period (or an equivalent amount for a different pay period frequency).  This determination is made on a pay period-by-pay period basis for each employee. 

 The amount of deferred Social Security taxes must be withheld and remitted ratably from wages paid from January 1 to April 30, 2021.  If necessary, the employer may make “arrangements” to otherwise collect the deferred taxes from the employees. 

 The Notice provides no guidance on how to collect deferred taxes from employees who have separated from service, and employers will be liable for such taxes if not collected from employees.  Consequently, most advisors and business groups (including the U.S. Chamber of Commerce) are recommending that employers not elect to defer such taxes since employers may end up being liable for employee taxes that they are unable to collect and that the logistics of implementing the deferral are “unworkable”.

 We recommend that employers considering implementing this proposal give the implications serious consideration before doing so. 


IRS Experiencing Processing Backlogs Due to Pandemic

Posted by Admin Posted on Aug 20 2020

Due to shutdowns at their processing centers, the IRS is experiencing significant delays in processing paper-filed returns and correspondence. 

Taxpayers should expect delays in receiving refunds from paper returns and in receiving responses to correspondence.  Payments sent by mail may still be unopened, but the IRS will post such payments on the date received instead of the date processed; the IRS advises taxpayers not to cancel their checks in such cases.  In addition, taxpayers may receive notices containing a response date that is already past due.  These notices should contain an insert stating an extended due date. 

Information about IRS issues affected by the pandemic can be reviewed at


Congress Enacts Laws in Response to Coronavirus Epidemic

Posted by Admin Posted on Mar 31 2020

In response to the Covid-19 epidemic, Congress has enacted the Families First Coronavirus Response Act and the Coronavirus Aid, Relief, and Economic Security ("CARES") Act.  The Acts provide a host of economic assistance to individuals, businesses, nonprofits, and governmental units.  Following is a summary of provisions that will have the most widespread impact.  Please contact us for more details about provisions that may affect you.

Recovery rebates: The CARES Act provides for payments (“recovery rebates”) to individual taxpayers, which are treated as advance refunds of a 2020 tax credit.  The credits are $1,200 ($2,400 for joint filers), plus $500 for each qualifying child. The credit is phased out for taxpayers with adjusted gross income above $150,000 (for joint filers), $112,500 (for heads of household), and $75,000 for other individuals. The credit is not available to nonresident aliens or individuals who can be claimed as a dependent by another taxpayer.  Taxpayers will reduce the amount of the credit available on their 2020 tax return by the advance refund payment they receive.

Retirement plans: Taxpayers can take up to $100,000 in coronavirus-related distributions from retirement plans without being subject to the Sec. 72(t) 10% additional tax for early distributions.  Eligible distributions can be taken up to Dec. 31, 2020.  Coronavirus-related distributions may be repaid within three years.  For these purposes, an eligible taxpayer is one who has been diagnosed with SARS-CoV-2 virus or COVID-19 disease or whose spouse or dependent has been diagnosed with SARS-CoV-2 virus or COVID-19 disease or who experiences adverse financial consequences from being quarantined, furloughed, or laid off, or who has had his or her work hours reduced, or who is unable to work due to lack of child care.  Any resulting income inclusion can be taken over three years.  The bill also allows loans of up to $100,000 from qualified plans, and repayment can be delayed.

Minimum Required Distributions - Required minimum distributions are suspended for 2020.

The Paycheck Protection Program  (most banks) for up to 2-1/2 months of payroll and related costs to employers with fewer than 500 employees.  Of this, up to two months of payroll, rents, mortgage interest, and utilities expenses will be forgiven if payroll levels are maintained. 

The Economic Injury Disaster Program provides loans through SBA-approved lenders to employers with fewer than 500 employees with interest at 3.75% (2.75% for nonprofits).

Employers with fewer than 500 employees must provide their employees with paid sick leave or expanded family and medical leave for specified reasons related to COVID-19. These provisions will apply from April 1, 2020 through December 31, 2020.  Payroll tax credits are available to offset the costs.



IRS Issues Guidance About Rental Properties and the New Qualified Business Income Deduction

Posted by Admin Posted on Jan 31 2019

The Tax Cut and Jobs Act of 2017 added Code Section 199A, which provides a  deduction for 20% of qualified business income.  Proposed regulations issued in August 2018 did not address whether real estate rentals would qualify for the deduction.  The IRS has now issued temporary guidance on real estate rentals in Notice 2019-7.

The Notice provides a safe harbor for treating a "rental real estate enterprise" as a qualified business for the Section 199A deduction.  A real estate rental enterprise is an interest in real estate held for the production of rents and that is either held directly by the owner or an entity disregarded from its owner.  It may consist of multiple properties, but commercial and residential property cannot be part of the same enterprise.   Even if a property does not meet the safe harbor requirement, it may still be treated as a qualified business if the general criteria are met.  However, meeting the safe harbor requirements means that a taxpayer can rely on the property qualifying for the deduction (subject to other limiting factors).

To meet the safe harbor requirements, three criteria must be met-

1) Separate books and records must be maintained to reflect income and expense for each rental enterprise;

2) 250 hours of rental services must be performed each year.  These services may be performed by either the owner or others, or both, and include advertising, negotiating and executing leases, collecting rents, operating and maintaining property, and supervising employees and contractors.  It does not include financial or investment management activities, such as procuring property or arranging financing.

3) Beginning in 2019, the taxpayer must maintain contemporaneous records of time spent on rental services, and such records must be made available to the IRS.  

In addition, a statement made under penalties of perjury must be attached to the taxpayer's return attesting that the above requirements have been met.


Final Regulations Issued for Qualified Business Income Deduction

Posted by Admin Posted on Aug 10 2018

The Tax Cut and Jobs Act of 2017 added Code Section 199A, which provides a  deduction for 20% of qualified business income.  This provision attracted much attention but raised many questions about the details. 

On January 22, 2019, the IRS issued final regulations on this deduction, which largely follow the proposed regulations issued in August 2018.  A quick summary is as follows-

 1.  The deduction applies to qualified business income passed-through by sole proprietorships, S Corporations, and partnerships to any entity other than a C Corporation.  It also applies to qualified REIT dividends and qualified publicly traded partnership income.  It does not apply to income earned as an employee, including reasonable compensation paid to an S Corporation shareholder, or to guaranteed payments to a partner. 

2.      The deduction is limited to 20% of taxable income before the Sec. 199A deduction in excess of net capital gains.

 3.      The deduction is from adjusted gross income, not to adjusted gross income, but applies regardless of whether or not a taxpayer itemizes.  It will not affect income subject to self-employment tax or Indiana taxable income.

 4.      If the taxpayer’s taxable income before the Sec. 199A deduction is below a threshold ($315,000 for marrieds filing joint and $157,500 for all others), no other limitations apply.  If the taxpayer’s taxable income is in a phase-out range ($315,000-$415,000 for joint filers and $157,500-$207,500 for others), partial limitations apply.  For taxpayers above the phase-out range, the following limitations apply-

·         Income from a specified service business is not eligible for the deduction.  Specified services businesses include the fields of health, law, accounting, consulting, athletics, performing arts, and brokerage of financial products.  They do not include real estate or insurance agents or brokers.

·       The deduction is limited to the lesser of- 1) 50% of W-2 wages from the business, or 2) 25% of W-2 wages from the business, plus 2.5% of the unadjusted basis of qualified property in the business.


Please contact us if you would like more information about this complex area..



New Accounting Standard Clarifies Accounting for Contributions

Posted by Admin Posted on Aug 07 2017

In June 2018, FASB issued Accounting Standards Update 2018-08, "Clarifying the Scope and the Accounting Guidance for Contributions Received and Contributions Made."  The standard is effective for years beginning after December 15, 2018, but may be early adopted.   

The new standard focuses on two topics - 1) determining whether transactions are contributions or exchange transactions, and 2) determining whether contributions are conditional or unconditional.  Both topics affect when and how revenue from transactions are recognized. 

Currently there is much diversity in practice in how certain transactions - particularly with government entities - is recognized, and one of the purposes of the proposal is to bring uniformity in recording such transactions.  The standard will likely result in more governmental grants and contracts being treated as contributions rather than exchange transactions.  The standard also provides a framework to evaluate whether a contribution is conditional or unconditional.  Included in the standard are several illustrative examples that should prove useful in implementing the new provisions.    

New Accounting Standard for Recognizing Credit Losses

Posted by Admin Posted on June 22 2016

In June 2016, the Financial Accounting Standards Board issued Accounting Standards Update (ASU) No. 2016-13Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.  Beginning in 2021, credit losses will be recognized using an "expected loss" model (i.e. losses are recorded based on the full amount of expected losses), rather than the current "incurred loss" model (i.e., losses are not recorded until it is probable that a loss has been incurred).  Under this more conservative model, credit losses will be recognized earlier than they were previously.

The standard will apply to all entities with financial assets, such as trade receivables and loans. Thus, expected credit losses will be measured based on past experience and current and reasonably supportable forecasted conditions.  Though many of the loss estimation techniques currently being applied will continue to be permitted, the inputs to those techniques will change to reflect the full amount of expected losses. 

The new standard is not effective until calendar 2021 for non-public entities, with early implementation allowed in 2019.

New Lease Accounting Standard to Have Big Effect on Lessee Balance Sheets Beginning in 2022

Posted by Admin Posted on May 02 2016

The main change in the new standard is that lessees must recognize, in their balance sheets, leased assets and lease liabilities for operating leases.  Currently, lessees do not record either assets or liabilities for operating leases.

The new standard covers all entities – both for-profit and nonprofit - that issue financial statements in accordance with U.S.. generally accepted accounting principles (GAAP).

For non-public entities, the standard takes effect in years beginning after December 15, 2020 (i.e., calendar 2021), with early application permitted. It will apply to all leases in effect as of the beginning of the earliest comparative period presented; in other words, if 2020 comparative statements are included with 2021 statements, leases in effect at January 1, 2020 will be covered.

 For lessees-

  • At the start of a lease, lessees must record both an asset and a liability for the net present value of future lease payments. The asset will be amortized to expense, and lease payments will reduce the liability, over the lease term. How that is done depends on whether the lease is an operating or a finance lease.
  • The biggest effect to lessees will be on their balance sheets. The new standard will gross-up lessee’s assets and liabilities for leases, which will change financial statement ratios and may affect compliance with loan covenants.


For lessors-

  • Unless a lease is sales-type or financing lease, lease income is simply recognized when earned, and there is no grossing-up of assets and liabilities.


Depending on the number and value of leases, the new standard could have a large effect on lessee balance sheets by increasing both assets and liabilities. This, in turn will affect certain balance sheet ratios, particularly the current ratio and the debt-equity ratio. Since many loan agreement contain covenants that specify minimum current ratios and maximum debt-equity ratios, lessees may want to discuss the effects of the new standard with their lenders before it goes into effect and make appropriate adjustments to affected covenants.