Financial Accounting Standards Board
New FASB Rules on Accounting for Leases: A Sarbanes-Oxley Promise Delivered
Donald J. Weidner, 72(2): 367-404 (Spring 2017)
Congress responded to the first financial accounting scandals of the new millennium by enacting the Sarbanes-Oxley Act of 2002, which required the Securities and Exchange Commission (“SEC”) to study issuers’ filings and report on whether their financial statements reflect the economics of off-balance sheet arrangements to investors in a transparent fashion. In 2005, the SEC reported that there “may be approximately $1.25 trillion in non-cancellable future cash obligations committed under operating leases that are not recognized on issuer balance sheets, but are instead disclosed in the notes to the financial statements.” Accordingly, the SEC requested that the Financial Accounting Standards Board (“FASB”) craft new rules to record more lessee liabilities on the balance sheet.
In 2016, the FASB issued sweeping new rules that affect virtually every firm that leases assets “such as real estate, airplanes, and manufacturing equipment.” In a dramatic change in approach, every lease extending more than twelve months will be capitalized and recorded on the lessee’s balance sheet as reflecting both a “right-of-use asset” and a corresponding liability. The new rules move away from the formalism of bright-line rules and toward an affirmative obligation to record economic substance. This article provides an overview of the history, policy, and mechanics of the new rules, which are likely to have a significant economic impact on many companies.