The New Lease Standard: Get Ready for Changes
Starting in 2019, public companies face a new accounting rule for reporting leases. Despite the one-year reprieve offered to private companies, all businesses would be wise to begin the process of implementing the rule now. The Financial Accounting Standards Board (FASB) has recently provided revisions to help ease implementation. Read on for a rundown of the changes.
Old rules, new rules
As the current rules stand, businesses don’t have to record lease obligations on their balance sheet unless the arrangements are regarded as financial transactions. Since accounting rules grant companies the option of forming agreements that will be considered simple rentals for financial reporting purposes, not many arrangements get recorded. Some businesses prefer this since any obligation not recorded on the balance sheet allows the company to appear less leveraged that it actually is.
The FASB issued a new standard in 2016, making significant changes to current accounting practices for leases. In short, companies are now obligated, under Accounting Standards Update (ASU) No. 2016-02, Leases (Topic 842), to identify on their balance sheets all assets and liabilities involved with their rentals.
Under the new standard, the majority of existing arrangements that are presently reported as leases keep being reported as leases. Moreover, it is anticipated that the new definition will take in additional types of arrangements not currently reported as leases.
Not long ago, the FASB altered two provisions, thus making the lease guidance easier to put into practice:
- Modified retrospective approach. As companies apply the new lease accounting standard, they can choose to display results using the current lease guidance for previous periods. Instead of looking backward at old leases, this permits management to focus on accounting for current and future transactions under the new rules.
- Maintenance charges. On March 28, the FASB decided to grant lessors and property managers the opportunity not to separately account for the fees for “common area maintenance” charges, such as security, snow removal and elevator repairs.
The FASB also makes concessions for oil-and-gas companies, energy providers and utilities by offering a practical expedient that holds rights-of-way to accommodate gas pipelines or electric wires. Due to this revised guidance, businesses that hold such land easements are spared from having to sort through years of old contracts to decide if they meet the definition of a lease or not. With that said, this practical expedient applies only to existing land easements.
Starting in 2018, more than $1.25 trillion of operating lease obligations are expected to be added to public company balance sheets, thanks to the lease standard. How will it affect your business? For help answering this question, please call us at 818-334-8623 or click here and we will contact you. We can also assist in evaluating which of your contracts now must be reported under new lease obligation guidelines.