After several delays, the new lease accounting rules will finally go into effect for many companies for the year ended December 31, 2022. These new rules will significantly impact the financial statements of transportation companies leasing real property, equipment, vehicles, and any other fixed assets.
5 ways the new lease rules may affect transportation companies
1. Many leases will present differently.
Under the current rules, many leases are recorded only as rent expenses on a transportation company’s income statement. However, under the new regulations, lessees will be required to record an asset and corresponding liability for substantially all leased property.
2. Existing leases will be incorporated in the change.
The terms of current leases are more than likely going to continue into 2023 and beyond, meaning every lease entered into will be presented differently on future financial statements.
3. Current loan agreements will be affected by the change.
Banking relationships are essential to transportation companies. Agreeing to loan covenants now, before understanding how this standard will affect a transportation company’s financial statements, may put a strain on this relationship that could be avoided.
4. Buy versus lease decisions on equipment could change.
Many factors are involved when deciding between leasing or purchasing a piece of equipment outright. If showing debt on the balance sheet is a consideration, this will need to be re-evaluated to verify how the lease will be presented in the future.
5. Comparative statements need to be calculated.
The standard needs to be implemented for the earliest period presented, which will require calculations and a new presentation for all years shown. Transportation companies should determine if the bank requires comparative statements. Single-year presentation will remove a year of lease liability calculations and restatement, which may save time and money, but may reduce the statements’ usefulness.
The best way for your transportation company to prepare for the new lease accounting rules is to plan ahead. Below are three things your transportation company should be doing now to prepare:
1. Identify and classify leases.
Review all existing lease and rental contracts and create an inventory list, including rent amount, interest rates, and security deposits. Lease documents will become necessary for accounting professionals, so start collecting and retaining these documents now.
2. Discuss Potential Changes with your Banker
The new accounting rules could add significant lease liabilities to your balance sheet, which could negatively impact covenants on your transportation company’s existing debt. It would help to discuss these changes with your banker to ensure they know what to expect in future financial statements.
3. Consider purchasing equipment before the end of the year.
If there are plans to enter into a new lease for equipment, consider purchasing it instead. For 2022, the section 179 depreciation deduction is generally $1,080,000, and the bonus depreciation rate is 100 percent. Note that bonus depreciation is scheduled to decrease to 80% starting January 1, 2023.