After 10 years of revision and deliberation, the U.S. Financial Accounting Standards Board (FASB) has issued its new standards for lease accounting. Adoption of these standards will be required for fiscal years beginning Dec. 15, 2018, with private companies adopting in Dec. 2019.
These changes will affect all organizations that lease assets. Here are five key takeaways to help you navigate these changes and minimize their impact on your organization.
1. The balance sheet impact is a liability, not a debt
Though many of the lease accounting rules remain the same or have changed only slightly, some changes are worth noting. The biggest change will be the way operating leases are accounted for on corporate balance sheets. Lessees will now be required to recognize all right-of-use (ROU) assets and lease liabilities on their balance sheets to clearly distinguish owned assets (finance lease) from rented assets (operating lease). But the operating lease liability is NOT classified as debt. It is classified as a “Non-Debt Operating Liability.” Your credit rating should not be impacted by these changes.
LaSalle customers will be able to utilize our no-cost, cloud-based platform, LAMP, to quickly identify ROU assets and export to Microsoft Excel or CSV files.
2. Some financial ratios and measures will change
Most ratios and measures will remain the same after implementation of the new FASB standards, including gross margin, net worth and return on equity. Others, such as return on assets (ROA), will change because of the addition of liabilities and ROU assets to the balance sheets.
Lessees who may have relied heavily on allocating internal costs associated with generating leases—deferring such expenses over the lease term—will have to reassess their Initial Direct Costs methodology and could see negative impacts on their income statements. Specific details for each organization should be evaluated by the Lessee’s accounting department and auditors.
3. Operating leases are still the best way to lease capital equipment
With all leases now on your balance sheet, you will see an increase in assets and a decrease in ROA, regardless of whether you have a finance or operating lease. However, only the present value (PV) is reflected on the balance sheet for operating leases, so they will still have the lowest asset amounts and the best comparative impact on ROA when compared to other equipment acquisition methods.
4. You still have the option to do a 12-month lease
The new standards will require lessees to recognize all assets and liabilities for leases with terms of more than 12 months, but there is an exemption for short-term leases. If you are leasing for 12 months or less, then the new balance sheet requirements will not apply and the current approach will be used.
5. The rules have changed, not the needs of the lessee
Although lease accounting is important and the FASB changes will impact your organization, your reasons for leasing remain the same. Your goal is still to protect against obsolescence and pay a sum less than the total cost of the equipment, and leasing is the best way to do that. Lessees can further reduce the negative impact of these changes by only leasing equipment they plan to refresh and avoiding some of the common pitfalls of the industry, such as interim-rent traps and evergreen clauses.
Related Post: 3 Red Flags to Watch Out for When Leasing Equipment
So what can you expect from the new lease accounting standards? There will be changes, however minimal, to your current leasing process, and it’s important for each organization to evaluate these changes and work with company accountants and auditors to prepare for implementation in 2018 (or 2019).
LaSalle Solutions is here to help you navigate these changes and ensure minimal impact to your organization. Leasing remains the best value for technology acquisition, and LaSalle will continue to work with you to examine the best options for your needs and budget.
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