If your company leases manufacturing equipment, real estate and commercial property, airplanes, and other business components, you’re going to experience a change of life, as are accountants and financial officers who work on and prepare financial statements. The Financial Accounting Standards Board (FASB) has issued new guidance – 10 years in the making – that puts new requirements on the reporting of leases in financial statements. The new standards will be phased in from December 2018 to December 2020. The impact will be felt much sooner as companies and accounting systems acclimate to the new world. Also, as leases are negotiated going forward, the FASB revisions issued February 25 will undoubtedly impact lease term decisions, negotiations, and terms.
In a news release announcing the Accounting Standards Update (ASU) FASB Chairman Russell Golden said,
“The new guidance responds to requests from investors and other financial statement users for a more faithful representation of an organization’s leasing activities.”
In short, enough interested parties felt they weren’t seeing lease-related information in annual reports and balance sheets. Thus, FASB – after the lengthy consideration process, has issued the new guidance. Here’s a portion of the FASB news release hitting the changes’ high points:
“…a lessee will be required to recognize assets and liabilities for leases with lease terms of more than 12 months. Consistent with current Generally Accepted Accounting Principles (GAAP), the recognition, measurement, and presentation of expenses and cash flows arising from a lease by a lessee primarily will depend on its classification as a finance or operating lease. However, unlike current GAAP—which requires only capital leases to be recognized on the balance sheet—the new ASU will require both types of leases to be recognized on the balance sheet.”
A lease quite obviously encumbers a company in some financial fashion in the form of payment obligations, costs – even the number of leases into which a company enters – and some critics have said that the present system doesn’t provide the transparency necessary for an accurate assessment of a company’s position.
As the new standards go into effect companies will have to capitalize their leases and list them in terms of assets and liabilities. The standards go into effect December 15, 2018 for public companies with fiscal years beginning after that date. Other companies and organizations will see the requirements go into effect in their fiscal years beginning after December 2019 or December 2020 (check with your accountant to see how you are affected). Though the actual accounting seems as if it’s years in the offing, the reality is that it’s coming over the horizon. For example, a financial statement due in 2019 will have to have profits and losses re-stated for 2017 and 2018, based on the FASB requirements. The new standards were also adopted by the International Accounting Standards Board (IASB), which has been working with FASB on this project.
Companies with leasing as a part of their business operations should begin immediately to ascertain the impact of the new regulations on their operations in how the FASB guidance affects their financial position and what impact it has on leases negotiated as part of their business model. It’s certainly possible that the business world nationally and internationally, watching year-after-year plodding progress toward the new rules, thought they wouldn’t happen.
The train, slow as it was, has arrived at the station.
The news release announcing the FASB guidance may be read here.
FASB information on the need for the new standards and related information may be read here.