FASB: New Guidelines on Recognizing Leases On-balance Sheet

On Feb. 25, 2017, the Financial Accounting Standards Board (FASB) released its lease accounting standard. Ushering in a new era in financial reporting, now companies have to report on assets and liabilities in their balance sheets. Prior to the standard, companies needed to disclose lease commitments in their financial statements; instead, they will now have to add lease obligations.

“The new guidance addresses the need to request from investors and other financial statement users a more faithful representation of an organization’s leasing activities,” Says FASB Chairman Russell Golden. “This will end what the US Securities and Exchange Commission and other stakeholders identify as one of the largest forms of off-balance-sheet accounting, while requiring more disclosures related to leasing transactions. “The guidance also reflects the input we received during our extensive outreach with preparers, auditors, and other practitioners, whose feedback was instrumental in helping us develop a cost-effective, operational standard,” he added. Continue reading FASB: New Guidelines on Recognizing Leases On-balance Sheet

Why You Need to Calculate Net Present Value

Money you have in your pocket now is more valuable than money you will have in the future. Why? Because, you can take that money, and use it now to run your business, or buy something now and sell it later. You can also put it in the bank and earn interest. But, to make smart investment decisions, you need to know when the best time to invest is. So, how do we compare the value of money now, with the value of money in the future?

Enter the term Net Present Value (NPV)

NPV calculates and compares if projects are worth the investment. It is a time value of money calculation. This is a commonly used term in the mind of experienced CFOs and business people, as it one of the most popular evaluation methods of capital budgeting. The net present value (NPV) is often a good way to analyze the profitability of an investment. However, like many methods in finance, it isn’t the end-all, be-all solution. There are negative aspects to NPV. Let’s take a closer look what they are, with attention to the benefits of it, as well. Continue reading Why You Need to Calculate Net Present Value

The 6 Key Pillars to Achieving Effective Capex Management

What it takes to manage capital expenditure is no small feat. We need considerable time and effort to budget, review, authorize and track capital projects. But, anything worth doing is worth doing well, isn’t it? So, in order to make capital investment a success, we have to optimize the management process.

According to this McKinsey & Co., half of corporate growth is directly attributable to capital investment, and companies that adhere to CapEx best practice are shown to generate an average of 25% higher profits than that of lagging competitors. Take a look at your company’s CapEx management process. Are you finding opportunities for improvement? If the end goal is to maximize growth, an effective capital investment process is the answer. Continue reading The 6 Key Pillars to Achieving Effective Capex Management

Is OpEx Better than CapEx?

When it comes to spending money on new equipment, software, and other assets for your business, you’ve got two options: you can either obtain them as a capital expense (CapEx), or as an operating expense (OpEx).

Here’s a scenario for you.

Let’s say you have purchased a company car. This is great as it will be yours to drive forever. You will write a check for it, and write it off as an operational expense (gas, repairs, mileage – OpEx expense.) But, what if you live in New York, where the price of a garage is more than a home, then it would make sense to use Uber to get around, instead of owning a car. You will write it off as a business-related expense – OpEx.

Gartner Says Global IT Spending will total of $3.7 trillion by the end of 2018, an increase of 6.2 percent from the prior year. For this reason, it deserves new consideration. Which is better for my business, and are both a viable option?

Let’s explore these options further. Continue reading Is OpEx Better than CapEx?

How to Reduce the Complexity of the Investment Decision Process

It is often the case that companies are tied up by bureaucracy, making investment procedures like approval processes complex, cumbersome, and confusing. When it comes to CapEx approval, there are many variables that come into play that push and pull the process in different directions, making it hard for leadership to actually make a decision about an investment.

A question arises: is it possible to make the approval process more effective? Answer: In order to do so, the internal decision-making process has to be challenged; after all, it has been found that 15-30% of CapEx savings were consistently delivered through portfolio optimization.

Continue reading How to Reduce the Complexity of the Investment Decision Process

The Importance of Having a Strategy to Tackle Large Investment Projects

The agreement between over half of executives is that the best way for leadership to ensure company success is to invest more time on strategy. CFOs are on the front-line of making more strategic decisions, and those who value basing decisions on data and analysis, tend to lean more on overall strategic planning for the company – and, doing so successfully.

But, as leadership works on mapping out these strategies, they often face challenges from those who come from more of a traditional perspective, like chief strategy officers (CSOs).

When these two sides of leadership hold explicit conversations about expectations on company’s capital allocation and strategic priorities, the two can work together and have more information on how to balance and achieve long-term growth.

Reconciling capital allocation to strategic priorities

It has been found that companies allocate ninety percent or more of their resources to the same projects and activities every year – regardless of changes in the marketplace or internal changes in company workflows.

When CSOs and CFOs bring insights to creating a better link between resource allocate and strategy, they can create portfolio-strategy processes that encourage more frequent, concrete conversations, that is held on an ongoing basis as opposed to the usual once-a-year, or every 3-5 year plan to sit down and discuss.

While CSOs pay attention to the way strategic decisions are made (by managing decision-makers and encouraging debate on different options), it’s possible to use data to set the discussions on course. To guide the discussion on strategy, there needs to be a conversion about the resources needed to fund it, reminding the executive team on the rationale for making changes based on real numbers, hard data, and metrics.

Looking for insights on growth beyond the company

There is agreement among CFOs that organizations need to up their game when it comes to growth-related processes. Recent McKinsey research shows that more than 60% of growth comes from doing business in markets that are growing well, and where companies experience a competitive advantage. In order to achieve this level, a long-term strategy must be in place.

Establishing a long-term strategy

Short-term investors are making it a challenge to balance a company’s long-term growth strategy with immediate objectives. Yet, when CSOs and CFOs work together, they have a key understanding of regulations, innovations, and industry trends that complement each other. Things like capital allocation and issues relating to stakeholders become topics of discussion. Together, they are able to put forth an option that improves a company’s short-term earning and its longer-term growth in a way that makes sense to the company as a whole.

The process of facilitating collaboration means explicitly voicing strategy and finance challenges. Formal structures work to start the budgeting process, and, that makes it possible for both sides to see how resources align with short- and long-term strategies.

Beating the Odds with Capital Investment

Using CapEx to support long-term growth is a central component of a successful business strategy as its purpose is to fuel growth. This means that crafting a strategy like a business plan will invariably anticipate greater returns on the invested capital.

However, greater capital expenditures do not lead to better returns when they aren’t thoroughly analysed prior to making a collective decision that will avoid risk and failure.

By working together, both CFOs and CSO can complement each other’s perspectives, and help leadership, the board, and other members of the executive team face the challenges that come with achieving growth based on large investment projects.

In conclusion..

With the multitude of options that may come your way to invest in, you have to consider working on a structured portfolio that optimizes your investment. This way, you can work to pinpoint the largest value with every invested dollar. Having a long-term strategy can get you there.

 

 

Should you be Leasing or Buying?

The Impact of the New Accounting Standard on Your Banking and Leases

As per the new leasing standard, the FASB requires all business owners to report all leases on their balance sheets. At first blush this sounds a lot less involved than it actually is. This simple requirement changes the relationship your business has with your bank starting January 2019. It changes the relationship because it impacts your business’ access to purchasing new capital.

This new standard is designed to bring all companies to the same international reporting standard and will apply to all equipment purchases like buildings, properties, and any other miscellaneous assets. All leases whether operating leases, like monthly rent expenses, or capital leases, like purchasing debt, must now be reported on your balance sheet.

Impact to your business

Bank Covenants

Moving from an operating lease to a capital lease won’t necessarily mean that you have a higher monthly payment. It just means that your debt will appear on your books. A capital lease is effectively a capital purchase and any bank covenant associated to a debt-to-equity ratio will be affected.

Also take into account what happens when you capitalize on rent payments. If your bank, for example, imposes a limit on your capital expenditure, and your building rent now gets treated as a capital lease, you now have a problem with accessing that capital. Keep an open line of communication with your bank so they can update your covenants as required.

Increase in administrative workload

Whether you’re outsourcing your accounting work or doing it in-house, you need to prioritize providing full disclosure. While you may not have to put all your leased equipment on the books, you will definitely have to account for interest payments. Simply because you won’t be entering into a new lease after the standard goes into effect, it doesn’t mean you don’t have to show your existing leases on your books. All your existing leases are now to be shown as capital leases.

The ultimate question – Buying or leasing?

Buying or leasing has always depended on bank covenants on capital access or on the business’s accounting tactic. Starting January 2019, all leased capital expenditures such as buildings, equipment, and facilities must be reported as if it is a purchased item. This has a huge impact on whether you prefer buying or leasing.

Key steps to stay informed

Staying vigilant regarding this new leasing standard requires immediate effort on your part.

With less than 6 months to go, you will need to prioritize your accounting strategy by:

  • Analyzing the kinds of implications the new standard will have on your capital leases.
  • contacting your bank to see how they view your covenants being affected.
  • Reviewing your current business model in how it views equipment leasing and purchasing.

Need to discussion the impact of this change on your business? You need to plan ahead if you see leasing/purchasing decisions in the future.

 

 

Capital Leases vs. Operating Leases. What’s the difference?

Understanding the Different Accounting Treatments of Capital Leases and Operating Leases

Wondering which lease you should be using to secure your assets?

As you already know, the alternative to purchasing equipment is leasing it. There are two kinds of leases that are used to accomplish this: capital leases and operating leases. Each is used for a different purpose, and also looks different on the accounting books.

A capital lease is likened to owning property, and an operating lease as renting it. There is a significant difference between the two. Let’s guide you through these two choices so you can understand their different treatments.

What is a Capital Lease? Continue reading Capital Leases vs. Operating Leases. What’s the difference?