By Craig Looper
A new standard from the Financial Accounting Standards Board (FASB) is changing how leases are defined and reported on a balance sheet. This new standard has a broad impact, affecting how companies that conform with generally accepted accounting principles (GAAP) account for leases. While it doesn’t take effect for private companies until fiscal years beginning after December 15, 2019, we want to help you prepare well in advance.
What’s Changing
Currently, leases are divided between capital leases, which are on the balance sheet, and operating leases, which are not on the balance sheet. Under the new standard, all leases with a term of 12 months or more—whether capital (which will be known as “finance”) or operating—will be on the balance sheet. While the accounting for lessors will be relatively unchanged, lessees will record a right of use asset and lease liability for all leases with a term of 12 months or more.
The Impact
The new standard means balance sheets will swell with the addition of an asset (the right to use the leased item) and a corresponding liability (the obligation to make lease payments). Current loan covenants and financial ratios may be adversely affected. The new operating leases will also change companies’ book/tax difference computations and may affect tax apportionment calculations and transfer pricing. To account for current and future lease agreements, new processes, systems, and controls may need to be put in place.
What You Need to Do
You can prepare for the new standard by performing an impact analysis, data assessment and lease analysis, and a review of systems, processes, and controls. You should also review your lease agreements, reconsider how you identify them, and distinguish between operating leases and service contracts. Finally, review your current loan agreements and related covenants, and discuss the impact of the new standard with your lender.
Sweeney Conrad can help you prepare for the new standard by proactively performing these analyses and reviews. To get started, please contact me.