Accounting Standards Update No. 2016-02, Leases (Topic 842), was issued by FASB on February 25, 2016, to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing transactions (FASB, 2021). Currently, Topic 842 provides lessees that are not public entities that allows them to choose, as an accounting rule, to use a risk-free rate as the discount rate for all leases. Rather than at the entity-wide level, the amendments in this update allow those lessees to make the risk-free rate election by class of underlying asset. Disclosure of which classes an entity elected to apply a risk-free rate is required. When the rate implicit in the lease is readily determinable, the amendments require for the lessee to use that rate regardless of whether it has made the risk-free rate election.

The update affects all companies and other organizations that lease assets such as real estate, airplanes, construction equipment and manufacturing equipment (WhalenCPA, n.d). For all leases with terms of more than 12 months on their balance sheets, lessees will be required to record assets and liabilities. This update applies to all leases whether capital leases or operating leases. Previously, lessees were only required to recognize capital leases on balance sheets according to generally accepted accounting practices (GAAP). The update also requires lessees to include qualitative and quantitative disclosures to help financial statement users understand the amount, timing and uncertainty of cash flows arising from leases. (WhalenCPA, n.d.)

Do you agree? Please explain.