Looking at New Definitions in Finance Leases

by corrigankrause
Close-up photo of a man signing a document

The new lease standard has introduced new terminology. What we have become used to calling “capital leases” will become “finance leases” with the implementation of FASB ASC 842. While balance sheet reporting and income statement expense recognition will remain substantially the same for finance leases, the FASB has introduced new terminology with the new lease standard.

Right-of-use asset.

The asset related to a finance lease is called a “finance lease right-of-use asset.” It must be reported separately from other assets on the balance sheet and will be classified as non-current. The old term, property held under capital lease, will cease to be used.

Lease liability.

The liability affiliated with a finance lease is called a “finance lease liability” and will be broken out between its current and non-current components. Lease liabilities must be reported separately from other liabilities on the balance sheet. The old term, “obligations under capital leases,” will cease to be used.

Income statement expense recognition.

This will remain essentially the same as under current GAAP. Finance leases will continue to recognize interest on the lease liability separately from the amortization of the right-of-use asset [formerly called “depreciation of property held under capital lease”].

Finance versus operating lease.

The criteria to identify a finance lease remain the same as those used to identify a capital lease. Consider using current GAAP capital lease criteria as a reasonable approach to identifying finance leases under the new lease standard.

The new lease standard is effective for private companies for annual reporting periods beginning after December 15, 2020 (2021 calendar year).

Please contact a member of your Corrigan Krause advisor team, or email info@corrigankrause.com for further discussion.