Starting in 2016, the Financial Accounting Standards Board (FASB) began releasing new “lease
rules.” After several “exposure drafts” and much discussion, we now have Topic 842, Leases.
These new rules will mean a huge change in accounting for leased assets and the associated
Generally, for “our size” institutions, these new standards will be required to be implemented for
fiscal years beginning after December 15, 2021. This means that – for schools with a June 30
year-end – your June 30, 2023 audit report will be the first affected. For institutions on a
calendar year, it will be December 31, 2022. All this means that you are already – or soon will
be – under the new rules.
As an overview of the new standards, let’s take a look at some “key concepts.” We will break
several of these down further in upcoming installments of “Finance Lab.”
Leases (defined): “A contract, or part of a contract, that conveys the right to control the use of
identified property, plant, or equipment (an identified asset) for a period of time in exchange for
consideration.” The leases that will be the focus of the new standards are those greater than 12
months in length. However, there are several factors – such as are the agreements “extendable”
– that may affect the analysis.
Then, under Topic 842, there are two types of leases: 1) Operating leases; 2) Financing leases.
One of the provisions of this new standard is that all leases must be recognized on a company’s
balance sheet.
For operating leases, ASC 842 requires recognition of a right of use asset (ROU) and a
corresponding lease liability upon lease commencement. Then, as you make lease payments,
those will be recorded as an expense and a reduction to the ROU(s).
Leases/contracts/agreements that qualify as financing leases under the new rules will be recorded
on your institution’s books of account (at the present value of lease payments, with potential
adjustments) as “ROUs.” Correspondingly, the liabilities associated with those ROU’s will be
recorded as a “payable.” Future effects on your Statement of Activities will include
Amortization expenses and Interest expenses – much like entries to record payments on bank
When the rubber meets the road, for most of us, this will mean lease agreements/contracts with
respect to copiers, audio/visual equipment, vehicles, internet equipment, etc. Contributions or
donations of facilities or other items would generally not be considered subject to a “lease” under
the new rules as they do not involve “consideration.”
For now, it is time to “inventory” all of the agreements and/or contracts that your institution is
party to. Then, there is a five-step process to analyze with of these contracts might require the
new treatment.

  1. Identify all leases
  2. Measure the term and consideration of each lease
  3. Classify Leases: separate “operating leases” from “financing leases”
  4. Disclose leases
  5. Separate leases and contributions.

Further, as you “inventory” your leases, you need to be looking for “embedded leases.” These
would be agreements/contracts that are ultimately classified as leases even though they are part
of another agreement.
We will continue to unpack this new standard in future installments. For now, get busy on the
“inventory” of your institution’s “leases.”

Written by
David C. Moja,

The information provided herein presents general information and should not be relied on as accounting, tax, or legal advice when analyzing and resolving a specific tax issue. If you have specific questions regarding a particular fact situation, please consult with competent accounting, tax, and/or legal counsel about the facts and laws that apply.