New ASU/IASB lease accounting standards: Achieve compliance with Microsoft Dynamics 365 and partner-driven solutions

While companies are hard at work preparing the Financial Accounting Standards Board's (FASB) new revenue recognition rules (effective for public companies in 2018), the effective dates for the new lease accounting rules contained in the FASB's Accounting Standards Update (ASU) No. 2016-02, Leases (Topic 842), and the International Accounting Standards Board's (IASB) International Financial Reporting Standards (IFRS) 16, Leases, are not far behind.

These rules are complex and quite intricate, and companies that do not begin to prepare soon may find it difficult to comply in a timely manner. Those organizations that use Dynamics 365 understandably will need both an integrated solution, and regulatory and technical guidance from their Microsoft partners. 

The new rules

Under the existing standards, lessees generally account for a lease based on its classification as a capital (or finance) lease or an operating lease. Lessees recognize capital leases (e.g., lease of equipment for nearly all of its useful life) as assets and liabilities on their balance sheets. Operating leases (e.g., of office or retail space for 10 years) are not recognized on the balance sheet, and appear in financial statements only as a rent expense and disclosure item.

According to the FASB, most lease obligations are not recognized on the balance sheet, and transactions often are structured to achieve off-balance sheet treatment.

ASU 2016-02 will require lessees to recognize assets and liabilities for substantially all leases with terms of more than 12 months, regardless of their classification. The right to use the leased asset will appear on the balance sheet as a right-of-use (ROU) asset. The obligation to make future lease payments - discounted to their present value - will be a liability. A lessee's recognition, measurement, and presentation of expenses ...