Myth: All Leases Will Be Capitalized
One of the most common myths about the new standards is that all leases will be capitalized. Watch to learn which leases need to be capitalized and important differences between IFRS and GAAP.
There are some myths out there as it relates to the new lease accounting standards, and one of them is that all leases will be capitalized. This, ladies and gentlemen, is not true. Before, it did give us an expedient, and what that expedient is, for FASB is that short term leases, that is leases, and that’s defined as leases that are less than or equal to 12 months. Leases less than or equal to 12 months can be exempt from capitalized. From being capitalized. Let me stress that that does not mean that they will not need to be disclosed. However, so they’ll at least be disclosed, but they would not need to be capitalized as a liability on your books. Also, the caveat is also that these leases, the short term leases, do not have a purchase option that the company is likely to exercise.
That’s also a slight difference from FASB, right? From IFRS. IFRS 16. IFRS 16 says they actually give you a practical expedience, also for short term leases. However, if there is a purchase option at all, if there’s a purchase option at all, then you need to capitalize it. So, that’s a slight difference between FASB and IFRS, right? GAAP requires, if you do not require capitalization, if the purchase option that you have is not likely to be exercised. If it’s likely to be exercise, then you’d need to, it needs to fall into A42. For IFRS, just the fact that it exists, just the fact that a purchase option exists, means that you would need to account for it under for IFRS 16. So, that’s the first myth. You do have this exemption for short term leases. Not all leases will be capitalized.