By: Holly Fields, CPA, Senior Manager
In 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2016-02 – Leases (Topic ASC 842). For non-public not-for-profit entities, this ASU is effective for fiscal years beginning after December 15, 2021 (i.e., calendar year 2022 for entities with a December 31 year-end).
Whether your not-for-profit has one lease or several, it is important to understand the changes this standard presents and to begin compiling the necessary information to properly account for all leases that the organization has entered.
Overview of Lease Standard (ASC 842)
Currently, only capital leases (now known as “finance” leases) are recorded as an asset and liability. Operating leases have no impact on the statement of financial position. Under the new standard, both types of leases must be considered and for those with terms longer than 12 months, an asset and liability should be recorded by the lessee.
Under the new guidance all leases recorded by the lessee will include the following at a minimum:
- Lessees will recognize a right-of-use asset and lease liability for most leases
- Lease classification will drive expense recognition (operating leases will result in straight-line expense, while finance leases will result in a “front-loaded” expense pattern)
- Enhanced disclosures are required
Lessor accounting of leases is largely unchanged from previous guidance; however, changes have been made to lessor accounting to conform and align that guidance with the lessee guidance and with the revenue recognition guidance under ASC (Accounting Standard Codification) Topic 606.
Furthermore, Blue & Co., LLC has put together step-by-step lessee implementation guidance covering all the significant and nuanced changes under this standard with a short tutorial video series as can be found here.
Not-For-Profit Specific Considerations for Lease Standard (ASC 842)
There are also certain lease-related situations specific to not-for-profit organizations that some may face with the implementation of the new lease standard. Not-for-profits that receive donated rent or have commitments for below-market leases should consider the applicability and impact of this new standard.
Donated rent often means a not-for-profit organization receives an unconditional promise to give the use of long-lived assets (such as a building or other facilities) for a specified number of periods. As this standard defines leases as contracts that convey the right to control the use of identified property for a period of time in exchange for consideration and there is no consideration exchanged (no lease payments), donated rent falls outside the scope of this standard.
Not-for-profit organizations that receive below-market leases (where lease agreements call for lease payments below the fair rental value of the property) have additional factors to consider in the implementation of the new lease standard. When calculating the right-to-use assets and lease liabilities, organizations should only include the actual lease payments made and not the excess value of the fair rental value of the property. Any additional value (essentially donated rent) would be recorded as a contribution. That contribution should be recorded at the fair value of the use (less any actual lease payments made) in the period in which the contribution is received, and the related expense recorded in the period the property or facilities are used.
If you have any questions as you implement this standard, please contact a Blue and Co advisor.