This video provides an overview of lease accounting based on the new accounting rule per U.S. GAAP (ASU 2016-02). Under the new rule, all leases longer than one year must be capitalized. This means the lessee recognizes the property being leased as an asset, along with a corresponding liability for the lease payments. This is important, as many firms avoided recognizing billions of dollars in liabilities under the old lease accounting rules by structuring their leases to avoid capitalization.
Even though all leases longer than one year must now be capitalized, both lessors and lessees must perform five different tests to determine what type of lease they have (lessees classify a lease as a finance lease or an operating lease, whereas lessors classify a lease as a sales-type lease or an operating lease).