Impact of Financial Accounting Standards Board Finance Essay

Impact of Financial Accounting Standards Board
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Impact of Financial Accounting Standards Board
The use of off-balance-sheet leases to distort the real company's liabilities has been a topic of long-standing disquiet. The new accounting standard (ASU 2016-02, Leases) introduced by the Financial Accounting Standards Board (FASB) now requires companies to recognize liabilities and operating lease assets on the balance sheet. (Trainer, 2018). Reports from the U.S. Chamber of Commerce and the Securities and Exchange Commission indicate that U.S. companies presently have about $2.8 trillion in operating lease obligation currently not appearing on the balance sheet (Rhode, 2019). The new accounting standards require nearly all leases to appear on a company's balance sheet. Like in the previous standards, leases under the new leasing standard are differentiated by two main types: operating and finance (capital) lease and this distinction are crucial as it determines how much and where the rent expense is to be recorded in the income statement. Using Starbucks as an example, this paper summarizes the impact of ASU 2016-02, Leases on the recording of leases, discuses elements featured in the current information reported by Starbucks, analyzes the impact of the new standard on reporting of Starbuck's leases, compares and contrasts the impact of that ASU 2016-02, Leases will have on the financial ratios of Starbucks and determines the impact of the changes to accounting for leases on the recommendations of stock analysts for Starbucks.
The most impactful change introduced by FASB’s ASU 2016-02, Leases is the prerequisite that the operating leases also have their accompanying liabilities and assets documented on the balance sheet at the present value of future lease payments (Trainer, 2018). Such large liabilities and assets, which were once hidden in the footnotes, will now be included directly on the balance sheet and this improves transparency for public equities and investors. This new standard required reporting on just one rental/lease expense, but since assets are now being recognized, the impairments will also be indicated on the income statement, outside of the lease cost. In the year 2006, FASB started on a project to improve the reporting of leases in a professional financial manner. In 2016, FASB issued a new standard, ASU 2016-02, Leases that required both private and public companies to consider their lease in the balance sheet. Before the update, companies only listed capital assets on the balance sheet and contracts on the footnotes. On the part of operating leases, both liabilities and assets were never reported on the balance sheet, even though the entities employed the assets and contractually mandated to pay the lease. At the same time, capital leases demanded separate interest and depreciation expenses before the new standards and operating leases also required a rental expense or a lump-sum.
Under ASU2016-02, all the capital assets in a company will be termed as finance leases, and both the finance leases will be included in the balance sheet. The new guidelines improve the understanding and comparison of lessees and go further to clarify the practices within the contract. This would greatly control revenue consolidation and recognition at Starbucks. ASU2016-02 articulates well with a mode of accounting in companies called Topic 842. Topic 842 records Leases similar to Starbucks. Leases are important records that should be appropriately maintained, especially to the way they function. It is paramount to monitor operations within the lease as well as maintaining the required accuracy stipulated in the lease. FASB has stability when it comes to notating these types of data that clients would expect to get. The FASB's main agenda when issuing this update is to increase transparency and comparability among various organizations by taking into account the lease assets and liabilities within the balance sheet. Critical information about the lease agreements should also be disclosed to clients as stakeholders should have a clear view of the lease impacts on the balance sheet.
According to FASB, users of accounting information will have a clear picture of company leasing activities. This why an amendment like the Accounting Standards, ASU 2016-02 seeks to ensure critical information like leases is included in the balance sheet. ASU was created to put clear the rights and responsibilities that could arise because the leases are to recognize the lease assets and the lease liabilities that come from the leases within the financial positions. The ASU also states to disclose both qualitative and quantitative information in terms of whether there will be variable lease payments, an opportunity to renew the lease, or even terminate the contract. All these lease activities should be operated under Generally Accepted Accounting Principles, which are also known as GAAP. The amendment of ASU2016-02 can help address issues that are associated with the accurate recording of lease agreements. The main characteristic of ASU2016-02 is that it keeps the assets out of the balance sheet while the liabilities are recorded at the footnote. Capital leasing way of recording requires that liabilities and assets be included in the balance sheet (Hsieh & Su, 2015).
Starbucks focuses on contingent rent, the type of lease whose payment does not comprise of a fixed amount. Contingent r...