From the course: Accounting Foundations: Leases
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Summary of the new lease accounting rule
From the course: Accounting Foundations: Leases
Summary of the new lease accounting rule
- In 2016 the FASB in the United States, and the IASB in London adopted a new Lease Accounting Rule that puts all long-term leases on the balance sheet. This rule eliminates the Off-Balance Sheet Financing aspect of the old controversial Operating Lease Accounting. This rule went into effect in the United States starting in the year 2019. The impact? Trillions of dollars in lease obligations previously excluded from the balance sheet will now need to go on the balance sheets of companies around the world. Here's how the rule works, let's say on January first of year one, Company L signs a long-term lease with long-term defined as longer than a year. Company L looks at the amount of the lease payments for the length of the lease and calculates how much it would have to pay in one large amount today instead of waiting and making the annual payments. This calculation involves the time value of money. The amount is called the Present Value of the future lease…
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