Truck leasing is utilized by many different entities. It is a means of gaining access to assets, obtaining financing and reducing a company’s exposure to the full risks of asset ownership. It is important that users of financial statements have a complete and understandable picture of a company’s leasing activity. Previous lease practices did not always provide a faithful representation of leasing transactions. It did not require lessees to recognize assets and liabilities arising from operating leases on the balance sheet.
Accounting Standards Codification Topic 842, also known as ASC 842 is the new lease accounting standard published by the Financial Accounting Standards Board (FASB). The purpose is to close a major accounting loophole in the previous standard off balance sheet operating leases. Under ASC 840, capital leases were recorded on a company’s balance sheet but operating leases were not. The FASB is issuing this update to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about the leasing arrangements.
Public companies began to implement the standard starting December 15, 2018. In August 2019, the FASB met to decide on extending the effective date for private companies and it was approved thru January 1, 2021. This impacts only domestic leases for domestic companies.
There will be an increase in assets and liabilities on the balance sheet. Going forward under ACS 842 both classifications of leases, operating and finance, will be capitalized on the balance sheet. There are few exceptions, such as short term leases less than or equal to 12 months in duration.
While there is some related administration burden in the beginning, it will become business as usual and leasing remains attractive because the amounts capitalized will be significantly lower than in ownership.
If you are interested in a Peterbilt truck lease visit or call your local JX today to meet with a Lease Executive!
Author: David Benicek, Lease Sales Executive