New Leasing Standard Requires Preparation, Key Decisions to Avoid Compliance Issues

By the end of next year, lease expenses will become a much more important consideration for American businesses, in the wake of recently-issued standard by the Financial Accounting Standards Board (FASB) that will require both public and private companies to show those obligations on their balance sheets.

 

As far back as 2005, financial regulators had pegged leases as an area for review, since widespread off-balance sheet accounting treatment for such transactions may not have provided enough transparency about these obligations. Under Topic 842 (Leases), organizations that lease assets (or “lessees”) must soon recognize on the balance sheet “assets and liabilities for the rights and obligations” created by those agreements. This “right of use” model will also compel lessees to recognize all lease-related assets and liabilities for terms exceeding 12 months. Finally, while current Generally Accepted Accounting Principles (GAAP) require only capital lease recognition on a balance sheet, the new standard will add finance and operating leases to that recognition list.

 

Public companies will need to comply with the new lease accounting standard starting in fiscal years (and interim periods) that commence after December 15, 2018. For private companies and other organizations, the standard becomes effective in fiscal years that start after December 15, 2019, or interim periods within the fiscal year that begin after December 15, 2020.

 

Beware of Potential Trouble Spots

While the new lease standard was issued in early 2016, a recent industry survey showed that only 20 percent of companies had begun preparing for the transition. Clearly, delays may not be a big deal for some industries with relatively simple agreements or minimal lease exposure. On the other hand, other sectors with complicated lease arrangements – such as banking, restaurant chains, retailers, supermarket chains and telecommunications firms – would be wise to tackle their due diligence now rather than deal with significant accounting problems after the standard takes effect. This is even more important for multinational companies with high lease exposure, since there are slight compliance variations between the U.S. GAAP and International Financial Reporting Standards (IFRS).

 

Four Steps to Help Prepare for the New Standard

July 28, 2017