Understanding Lease Accounting Standards by Public Industry, Private Industry, and Region
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Lease accounting requirements for finance/capital leases and operating leases vary from industry to industry and by region. For example, manufacturing organizations classify leases according to ASC 842 or, if they have international operations, IFRS 16, while U.S. governmental entities must classify leases by GASB standards. It’s important to match your industry to the appropriate lease accounting standard.
Below are the most common industries that must abide by lease accounting standards set forth by the Financial Accounting Standards Board (FASB) and Government Accounting Standards Board (GASB).
Manufacturing
The manufacturing industry is one of the largest users of industrial equipment, which means that there are a large number of finance and operating leases. For example, a company that manufactures automobiles will need to account for the lease of its assembly plant as well as the vehicles it produces. Manufacturing companies use ASC 842 or IFRS 16 to account for leased assets.
Construction
The construction industry is another major user of leased equipment, such as excavators, bulldozers and cranes. Construction companies must also comply with ASC 842 or IFRS 16 and classify their leases as either finance or operating leases.
Transportation
The transportation industry includes a wide range of businesses, such as airlines, trucking companies and railroads. These businesses typically lease aircraft, vehicles and other equipment. ASC 842 requires that transportation companies classify their leases as either finance or operating leases.
In addition to complying with ASC 842 and IFRS 16, transportation companies must also comply with the requirements of the Department of Transportation (DOT) and the Federal Aviation Administration (FAA). These agencies have their own regulations that transportation companies must follow when leasing aircraft, vehicles and other equipment.
Energy and utilities
The energy and utility industries also have many leased assets, such as pipelines and power plants. These companies must comply with both ASC 842 and GASB standards when accounting for their leases.
Unlike ASC 842 requirements, GASB standards require energy and utility companies to disclose information about their use of leased assets, such as whether they are used for operational or non-operational purposes. Operational leases are those that are essential to the company’s operations, while non-operational leases are not.
Healthcare
The healthcare industry is another major user of leased assets, such as medical equipment and office space. Healthcare organizations must comply with ASC 842 standards when accounting for their leases.
Like other industries on this list, healthcare organizations must classify their leases as either finance or operating leases. However, they must also disclose information about how they use their leased assets, such as whether they are used for patient care or administrative purposes.
Information technology
The information technology industry encompasses a wide range of businesses, such as software companies, computer manufacturers and telecommunications providers. These businesses typically lease office space, computer equipment and other types of property.
Organizations in the information technology industry must comply with ASC 842 and possibly IFRS 16 and the requirements of the Federal Communications Commission (FCC). The FCC has its own regulations that information technology companies must follow when leasing telecommunications equipment.
Retail
Companies in the retail industry often lease assets like store locations, office space and warehouse space. These types of leases are classified as operating leases under the ASC 842 standard.
Retail companies must disclose information about their leased assets, such as the total number of store locations that are leased and the future lease payments that are due.
Government
Government entities, such as city, state and federal agencies, must comply with the requirements of the Governmental Accounting Standards Board (GASB). GASB has its own set of standards that government entities must follow when accounting for their leases and subscription-based IT agreements (SBITAs): GASB 87 and GASB 96.
Unlike ASC 842, GASB standards do not require government entities to classify their leases as either finance or operating leases.
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