Impact of the new FASB Lease Accounting Standards
In 2016, FASB and IASB issued new lease accounting standards that go into effect as soon as 2019. Today, leases are classified as either capital (finance) leases or operating leases, with capital leases appearing on the lessee’s (obligor’s) balance sheet while operating leases are “off” balance sheet. The new FASB lease accounting standards are designed to provide greater transparency on a company’s lease assets and liabilities, with no more off-balance sheet treatment allowed.
While these new standards have been under development for over ten years, public companies need to implement these standards after December 15, 2018 and privately held companies after December 15, 2019.
Impact on Equipment Leases
More than 95% of the contracts in most companies’ lease portfolios are equipment leases. While some experts on the new accounting standards believe the majority of large, public companies will not change their leasing behaviors, many private companies will most likely go off spreadsheets and have inconsistent treatment.
Some of the most immediate impact falls in these areas:
•All leases longer than 12 months must be capitalized and reported as assets and liabilities.
•The operating lease liability is not classified as debt. It is classified as a “Non-Debt Operating Liability."
•By reporting lease liabilities on balance sheet, the lease vs. buy decision will shift in some cases towards “buy” while some assets and situations will retain leasing advantages (liquidity concerns and technological obsolescence).
•Companies need to discuss with their accounting software provider any new requirements or enhancements needed to help meet the new standard.
•Companies need to review debt covenants and discuss any potential implications with their bank or creditors.
A Big 4 accounting firm poll recently showed approximately one third of the private companies asked are currently implementing the new FASB lease accounting standards, one third are assessing the impact and one third have not started a review of the impact. In all cases, management will want to explore new lease process and operational procedures to save both time and expenses. If you are in the process of determining how these changes may affect you or your clients and prospects, CapX Partners can assist in evaluating whether leasing or buying is the best decision for your organization moving forward.