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
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.