Proper recognition of company assets and liabilities is important to the transparency of financial reporting and increased comparability between businesses. The Financial Accounting Standards Board (FASB) is in charge of consistently improving the reporting standards, and a topic of discussion in recent years has been financing provided to entities through lease agreements. Until accounting standards update 2016-02 (Topic 842), a company was able to keep certain leases off of their balance sheet.
The accounting standards update (ASU) released in 2016 by FASB is coming ever closer to its effective dates for all entities. Public companies are already having to oblige to the new rules for fiscal years beginning after December 15, 2018, whereas the new standards go into effect for nonpublic companies for years beginning after December 15, 2019. After the ASU becomes effective, companies will be required to record an asset and liability for both financing and operating lease contracts lasting greater than 12 months. For each asset that is under a lease, the company will be required to book an asset on the balance sheet called a right-to-use asset. This asset will be amortized over the length of the lease using the straight-line method. A corresponding lease liability must also be recorded at the present value of the lease payments.
The updated lease standards should be a discussion that all businesses have with their advisors to determine what impact it could have on their financial position. Now is the time to stay ahead of the upcoming change and to determine if additional conversations are needed to discuss the impact on debt covenants with your lender.
If you have questions about the new lease standard, contact Seth Hanenburg at 616-458-1835 or firstname.lastname@example.org