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.

This new lease accounting standard affects companies and businesses that lease assets. Companies in the real estate, airplanes, and manufacturing equipment industries are all responsible for including lease obligations.

“With comparative reporting requirements for the new lease accounting standards starting as early as 2017 for most firms, we believe that many Fortune 500 companies are woefully unprepared for the new lease accounting standards, especially their equipment lease portfolio, LeaseAccelerator CEO Michael Keeler said in a written statement. “We hope the publication of this report will provide CFOs with a perspective on the relative size and significance of their operating lease obligations compared to their industry peers and prompt a proactive investigation of solutions given the 2017 income statement comparable deadline.”

The New Reporting Requirements for Lessees

Previously, recognizing, measuring, and presenting expenses that arose from a lease for lessees depended on the classifying of finance (capital) leases or operating leases. However, unlike the current Generally Accepted Accounting Principles (US GAAP), only capital leases are recognized on the balance sheet.

“The new lease accounting guidance represents a significant change for lessees, and companies will have to understand the details of the new guidance to be able to adopt it,” said Anne-Lise Vivier, CPA, managing editor of accounting publications for Thomson Reuters and coauthor of the report. “Both lessees and lessors have to assess how pervasive the changes are to their specific situations in order to ensure smooth adoption of the new leasing standard.”

This will enable investors and financial statement users to better understand such things as amount, timing, and uncertainty of cash flows that could arise from leases.

Ralph Petta, president and CEO of the Equipment Leasing and Finance Association, believes the new guidance will not prevent companies from acquiring the necessary equipment to grow their businesses. “There are many reasons to lease equipment, and the primary reasons will remain intact under the new rules – from maintaining cash flow, to preserving capital, to obtaining flexible financial solutions, to avoiding obsolescence,” he says.

Make Sure you are On Time

If you are a public company, you will require to adopt the new standard beginning after Dec. 15, 2018.

Nonpublic companies will be required to apply the new leasing standard after Dec. 15, 2019.

It may seem ways away, but you should begin preparing for the new lease accounting requirements, today.

 

 

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