This course provides a basic understanding of the new leases standard, issued by FASB in February 2016. The new standard superseded the previous US GAAP standard 840. One of the main reasons to apply changes to the standard is to enlighten the users of financial statements about the leasing obligations of the entities in a better way.

The new standard specifically requires that operating leases of 12 months or more must be reflected on the balance sheet as both assets and liabilities, even if the lessee intends to return the asset to the owner or landlord. The Lessee will record a right of use asset and a lease liability for all leases with a term greater than one year.

If any of the five factors are present in the agreement, it's a finance lease for the lessee and a sales-type lease for the lessor. If none of the five factors is present in the agreement, it’s an operating lease for the lessee and an operating lease for lessor unless two more classification criteria are met and then the lessor will classify the lease as a direct financing lease.

At lease commencement, lessees will measure the leased asset (ROU) at the same amount as the lease liability (the present value of lease payments). Initial measurement is the same for both financing and operating leases. The accounting difference occurs in the subsequent recognition. For lessors, lease accounting practices remain largely unchanged.