Does your company lease office or warehouse space, cars or trucks, forklifts or photocopiers? Regardless of the type of property, plant, or equipment you have, if you lease it, it’s time to plan for the impact of the new lease accounting rules.
In February 2016, the Financial Accounting Standards Board (FASB) issued the new lease standard. The standard requires non-public companies to record both the obligations and assets associated with long-term leases (those exceeding 12 months) on their balance sheets for fiscal years beginning on or after December 15, 2019. In other words, all lease agreements in effect on or after January 1, 2020, need to be recognized on the balance sheets of calendar entities at that time.
I know what you’re thinking: that is over three years away. However, you probably have existing leases or are preparing to enter new lease agreements that will continue into 2020. Understanding the new lease accounting rules and their impact is key to successful preparation and implementation of the new guidance.
The new rules force off-balance sheet financing of capital purchases into extinction which impacts recorded liabilities. Increased liabilities impact your bottom line, financial ratios, and other arrangements, such as financial covenants and contractual agreements.
Start preparing today by gathering all current lease agreements, reviewing lease length and renewal options. Keep in mind, longer lease terms equal larger liabilities. Update both your accounting policy and procedures for assessment of future lease agreements. Finally, start talking. Communicate with your legal department as they may be integral in evaluation and implementation of the change and discuss the effects this standard will have on your financial reporting with your financial institutions to aid them in understanding the impact on financial covenants.
Have questions about lease accounting? Spire has experienced audit and accounting professionals ready to assist you in preparation for this new standard. Contact one of our team members today.