Do you understand the impact the new accounting standards have on your business? The Financial Accounting Standards Board’s (FASB) lease standard is going to significantly change the look of financial statements and the accounting for leases.
This is significant for any company that has leases or plans to lease real estate, vehicles, construction and manufacturing equipment and other assets. Although the standard does not go into effect until years beginning after December 15, 2019, you should be aware of the pending changes and start preparing.
BELOW ARE FIVE TAKEAWAYS FROM THE NEW STANDARD:
1. Three Types of Leases – Treated Three Different Ways
- Finance Leases. The term “capital lease” no longer exists. It has been replaced by “finance lease.” Finance leases will be shown as both an asset and a liability on the balance sheet and result in amortization and interest expense on the income statement.
- Operating Leases. Operating leases have historically only been disclosed, but will now be shown on the balance sheet based on the present value of the lease payments. Operating leases will continue to show a rent expense on the income statement.
- Short-term lease. A lease with a term of less than 12 months and contains no option to purchase the asset under lease is considered a short-term lease and continues to only be shown on the income statement through rent expense.
2. Balance Sheets are going to be Longer and Larger
Regardless of the size of your company, the new standard is going to change the look and, possibly, the perceived strength of your balance sheet. Both finance and operating leases will now be on the balance sheet. Meaning, balance sheets may need the following lines:
- Finance Lease Assets
- Operating Lease Assets
- Finance Lease Liabilities (current and long-term)
- Operating Lease Liabilities (current and long-term)
You may opt to disclose where on the balance sheet these amounts are presented, however, finance lease assets and operating lease assets cannot be on the same line on the balance sheet, and the same is true for the liabilities.
3. Disclosures are going to be Longer
The current disclosure requirements remain the same; general description of lease, terms and options to extend. However, additional disclosures include, by lease type:
- Total Costs
- Cash Flows
- Weighted Average Remaining Lease Term
- Weighted Average of the Discount Rates Used
4. Bank Covenants may be Affected
You should be aware of how financial measurements within loans or other documents are written. With operating leases being recorded on the balance sheet, current liabilities and long term liabilities may shift. Companies may want to discuss an option to exclude operating lease liabilities in future loan agreements with their bank.
5. This is Not a 2020 Problem
Companies impacted by the change should begin working toward implementation immediately. You should evaluate your need for GAAP based reporting and think through the potential impact of this change.
How Smith Schafer Can Help
- Provide training to help you understand the new standard.
- Assist with taking inventory of your existing leases.
- Perform analysis of the impact on your existing leases.
- Create and implement new processes, policies and controls to ensure correct implementation of the new standard.
Want to learn more?
We are hosting free seminars and webinars throughout the year to help you better understand these changes.