ASU No. 2016-02, Leases (Topic) 842, changes the way your business will record any new or existing leases, and could significantly impact your financial statements if you lease assets. Under the new standard, you are required to record a right-of-use asset and a lease liability on the balance sheet for each lease and amortize each asset and liability over the life of the lease.
However, there are exceptions to the rule, including an exception from short-term lease, which says leases that are 12 months or less with no purchase option, do not need to be recorded under the new lease standard.
Does that mean all month-to-month leases or leases without a formal contract don’t need to be recognized? Unfortunately, no.
These leases are considered cancelable leases and require consideration of substance over form. This means the intention of the company or organization needs to be considered over the legal form of the contract. Determining if your company or organization is reasonably certain to continue to exercise a renewal option requires significant judgement, and can be difficult to determine, especially with long lived assets such as buildings. Reach out to your accounting professional at Froehling Anderson to help you determine if your leases need to be recorded under the new standard or email contactus@fa-cpa.com.