Accounting rules for nonprofits are changing, and your nonprofit will soon report some of its leased assets differently. The Financial Accounting Standards Board published new standards for leases in FASB ASU 2016-02.
These new lease reporting rules, scheduled to take effect for fiscal years beginning after Dec. 15, 2019, will affect most nonprofits. Your organization doesn’t have to wait, however, and may adopt the new standards early at your discretion.
Two Types of Leases
Current accounting standards group leases in two categories: capital and operating leases. They treat a capital lease essentially as the purchase of an asset, since the terms of the lease are deemed to be tantamount to a purchase. Your balance sheet shows a capital lease as both an asset and a related debt, and that won’t change under the new standard.
An operating lease, on the other hand, is one in which a nonprofit pays only for the temporary “right to use” an asset. Current standards don’t require you to report such leases on your balance sheet, but only to disclose the terms and future rental terms in the notes to your financial statement — and that’s what will change.
All Leases on Balance Sheet
Under the new rules, both categories of leases will remain. But for those with terms longer than a year, your balance sheet will recognize the assets and liabilities attributable to the lease arrangement.
Your nonprofit will now report a multiyear operating lease as a “right-to-use” asset and also as a liability. Using the value of your lease payments, you’ll recognize one lease cost, allocated largely on a straight-line basis over the lease term.
The new rule also requires you to report certain qualitative and quantitative information about leases — such as renewal options and variable lease payments, for example. Further, your statement of cash flows will show all cash payments in operating activities.
Ever More Transparent
The purpose of the new lease accounting rules is to inject more transparency into nonprofit accounting. That will permit everyone who uses the financial statements to more easily understand and compare them for different organizations.
Specifically, the new lease accounting standard will provide more clarity about the timing and amount of cash flows involved in leasing.