Leased Assets, US GAAP Topic 842

Background:

Accounting Standards Update (ASU) No. 2016-02, Leases (ASC Topic 842) is effective for public companies for fiscal years beginning after 12/15/2018 and for private companies one year later.

Under the new lease accounting standard, many equipment and property leases that were previously expensed as rent expense will be capitalized and amortized as Right-of-Use (ROU) assets, with an offsetting entry to a lease liability account. ACS 842 requires leases to be classified as either an operating or a financing lease.

Assets under a financing lease will be accounted for much like capital leases were in the past – they can be entered in Sage Fixed Assets and depreciated using a straight-line method.

Assets under an operating lease are more complex. The amortization of the assets is closely tied to the amortization of the related lease liability so that the two jointly result in a straight-line lease expense to the income statement.

Note: Sage and LeaseQuery has formed a partnership to support the Lease Assets and Lease accounting aspect. Read about it in Are you looking for a Leased Asset solution?

Assets that are classified as a financing lease can be entered in Sage Fixed Assets and amortized on a straight-line basis. To separate leased assets from other owned assets for reporting and analysis purpose, it is suggested to customize one of the general information fields; so that grouping and subtotaling on reports is possible. See our Sage LeaseQuery Partner Press Release.

Sage Fixed Assets does not have a depreciation method for the amortization for leased assets under an operating lease, as the discount rate used in each lease agreement factors into the calculation of the amortization. Because of the magnitude of operating leases that companies have and the close tie between the calculation of the lease liability and the value of the right of use assets, it makes sense for many companies to establish a full subledger system for leased assets – one that allows for managing the leases themselves while also generating all the accounting entries for the lease liability and right-of-use assets under those leases. At this time, Sage Fixed Assets does not plan to develop a lease accounting module.