FASB's New Lease Accounting Standards Adopted 02-25-16
CLI Lease With $1 Buy-Out At End Of Lease Term
FASB and GASB LEASE ACCOUNTING: THE NEW REALITY ON LEASES
THE SOLUTION . . .
GASB's New Lease Accounting Standards Adopted 06-28-17
MORE ON FASB's LEASE ACCOUNTING CHANGES...
On 02-25-16, FASB's new lease accounting standards were adopted and will take effect for public companies for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. For all other organizations, the new standard on leases will take effect for fiscal years beginning after December 15, 2019, and for interim periods within fiscal years beginning after December 15, 2020. Early application will be permitted for all organizations. All leases signed earlier will be subject to the new FASB lease accounting standards.
THE MAJOR CHANGE IS THAT A LESSEE UNDER AN OPERATING LEASE MUST NOW RECOGNIZE THE ASSET AND LIABILITY ARISING FROM THE LEASE ON LESSEE’S BALANCE SHEET (or STATEMENT OF FINANCIAL POSITION). Lessee shall have a lease payment liability (including lease option periods if Lessee is reasonably certain to exercise an option to extend lease) and a “Right-to-Use” asset, representing its right to use the underlying asset. Operating Leases are still 100% expensed out, which reduces a Lessee's bottom line, and now Operating Leases are no longer off-Balance Sheet, eliminating any benefit to the Lessee in entering into, or continuing under an Operating Lease. The alternative to an Operating Lease (or after 12-15-18 a "Lease Without $1.00 Buy-Out") is a CLI Lease with $1.00 buy-out, which typically has similar or typically lease payments than an Operating Lease and greatly improves the Lessee's bottom line on its Statement of Income (or Statement of Operations for Non-Profit) and its Balance Sheet (or Statement of Financial Position for Non-Profit).
LESSEE ADVANTAGES (under a CLI Lease, as opposed to an Operating Lease or Lease Without $1.00 Buy-Out)
1. A DRAMATIC INCREASE TO LESSEE'S BOTTOM LINE ON ITS STATEMENT OF INCOME, as Lessee expenses out CLI's low interest and amortization of the "Right of Use" Asset over the Useful Life of the Asset, which for permanent real estate is typically 50 years. Thus, less is expensed out under a CLI Lease, as opposed to an Operating Lease (or Lease Without $1.00 Buy-Out), wherein 100% of the lease payments are expensed out until 12-15-18 when more than 100% of lease payments are expensed out in earlier years.
2. A SUBSTANTIAL INCREASE TO LESSEE'S NET WORTH AT THE END OF THE LEASE TERM when the Lessee buys out CLI for $1.00, resulting in a new asset, without liability, equal to the "Right of Use" Asset less the amortization of the "Right of Use" Asset at the end of the lease term, typically approximately 40-60% of the original "Right of Use" Asset.
3. AN ADDITIONAL DRAMATIC INCREASE TO LESSEE'S BOTTOM LINE ON ITS STATEMENT OF INCOME (or STATEMENT OF OPERATIONS FOR NON-PROFIT) at the end of the lease term when the Lessee buys out CLI for $1.00 and there are no longer any lease payments, which savings goes right to the Lessee's bottom line on an annual basis.
The exception to the above FASB guidelines is a Government or Government-owned University or Hospital ("Government"), which are governed under GASB Statement 87 that was adopted on 06-28-17. Under GASB, both an Operating Lease and a CLI Lease is accounted for in the same manner during the lease term, except that an Operating Lease (or Lease Without $1.00 Buy-Out) is amortized over the lease term, rather than over the Useful Life under a CLI Lease, thus there is considerably less expense under a CLI Lease than Operating Lease (or Lease without $1.00 Buy-Out), especially in the earlier years.
After CLI is bought out for $1.00 at the end of the lease term, the Government's bottom line on its Statement of Operations improves dramatically, as there is no longer a lease payment.
After CLI is bought out for $1.00 at the end of the lease term, the Government receives a new asset, generally 40-60% of the original costs, without liability, which improves its Net Assets on its Statement of Financial Position.
MORE ON GASB's LEASE ACCOUNTING CHANGES...
Credit Lease Investments, LLC
CLI's Senior Partners' office is located in Vernon Hills, Illinois, a northwest suburb of Chicago. CLI's Project Partners are located nationwide.
CLI does not provide tax or accounting advice. Each Lessee and Sublessee should consult its own tax and accounting professionals regarding the CLI Lease.
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