FAQ SERIES: What's the Difference Between an Operating and a Finance Lease?
Updated: Mar 26, 2020
Luckily, for lessees under GASB 87 and IFRS 16 this is a non-issue. In an effort to simplify the new lease accounting standards, the GASB (Government Accounting Standards Board) and the IASB (International Accounting Standards Board) opted to do away with lease classification.
Meanwhile, the FASB decided to maintain a classification system where leases are either categorized as operating or financing. For companies required to comply with ASC 842, here’s what you need to know about the differences between operating and finance (previously called capital) leases:
The FASB has made an effort to stress that there are no longer any “bright lines” like those that existed under ASC 840 that definitively qualified leases as either operating or capital. However, by maintaining the dual classification companies are left making determinations and establishing a line (however bright) between operating and finance leases. It should come as no surprise that under the new standard there are leases on the bubble that require classification determination that looks similar to the previous standard.
NetLease is a complete lease accounting and management tool developed to operationalize compliance with ASC 842 and IFRS 16 standards. It supports lease reporting throughout the entire lease lifecycle and includes functionality like push-button reporting for FASB and IFRS disclosures, full lease automation, integrated AP management, a robust audit trail, lease modification management and lease detail and document storage. Unlike other solutions on the market, NetLease is ready and currently deployed by public, private, and international companies.
About the authors:
Adam Riches, CPA is the Managing Partner at Netgain Solutions
Nathan Smart, CPA is a Partner at Netgain Solutions
For more information on automating your lease accounting, schedule a conversation with one of our CPAs.