The Financial Accounting Standards Board recently issued its new lease accounting standard. This update has been a long time coming, having been in the works for nearly a decade. The International Accounting Standards Board has been collaborating with FASB on this project since 2006. Over that time they released three documents which generated over 1,700 comment letters from the public.
The purpose of the update is to improve financial reporting regarding lease transactions. The update will ultimately affect all companies who lease assets, such as real estate, commercial vehicles and medical, construction or IT equipment. For some companies this change will mean putting operating leases on the balance sheet for the very first time.
Under the new guidance, a lessee will be required to recognize assets and liabilities for leases with lease terms of more than 12 months. Any leases with a duration less than 12 months are excluded from the standard. This may encourage companies to negotiate shorter-term leases.
These new standards will require that both finance and operating leases be recognized on the balance sheet, a change from Generally Accepted Accounting Principles (GAAP). The assets recognition, measurement and presentation of the leases expenses and cash flow will continue to depend on their classification as finance or operating leases, which is still consistent with GAAP.
The new standards will increase transparency and comparability across the globe as companies that lease assets are required to show liabilities and obligations on their balance sheets. By requiring more disclosures related to leasing transactions the update will combat one of the largest forms of off-balance-sheet accounting.
The Accounting Standard Update requires disclosures with both qualitative and quantitative components, which will give stakeholders a better understanding of a lease’s cash flow.
Many companies will be affected by the new leasing standard. Assets which were once classified on financial statements as an operating lease expense will now have a new home on the balance sheet.
The accounting standards update on leases will take effect for public companies for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. For all other organizations, the update will take effect for fiscal years beginning after December 15, 2019 and for interim periods within fiscal years beginning after December 15, 2020.
Although it may seem far away, companies should start preparing for the new standards by:
• Gathering information on all existing leases
• Capturing data for new long-term leases
• Developing accounting policies that will comply with the new standard
• Reviewing technology systems
• Engaging those within the organization such as accountants, legal groups or IT
Although it seems far away, companies should start preparing now. To further discuss how the accounting standards update on leases will affect your organizations, call one of our professionals today.