The Financial Accounting Standards Board (FASB) has issued an Accounting Standards Update (ASU) intended to improve the clarity of the financial reporting of lease transactions. The new lease reporting standard, issued on February 25, 2016, affects ALL companies and other organizations that lease assets for longer than 12 months such as, but not limited to, vehicles, manufacturing equipment, office equipment, and real estate. The FASB established this standard to provide transparency to investors and stakeholders about one of the largest sources off balance sheet financing.
With limited exceptions, the standard will require organizations that lease assets to recognize a right of use asset and a corresponding liability on a balance sheet for the rights and obligations created by the lease. Currently only capital leases are required to be recognized on a balance sheet, however this standard will add operating leases to the balance sheet as well. Under the standard, there will still be two types of leases, (operating and financing). Under both types, a company will recognize an asset and liability. However, under operating leases, lease expense will be recognized. Under financing leases, both amortization expense and interest expense will be recognized.
What this means for you is that your organization will need to keep track of all its leases to ensure that all of the data necessary for reporting is available to comply with the standard. Furthermore, adding operating leases to the balance sheet could make significant changes to the results that your organization reports to stakeholders and could create issues with debt covenants and other metrics with which your company must comply. If your organization leases a significant number of assets then an analysis of the effect of this standard on your financial statements should be conducted to allow time to make informed decisions and to begin talking to stakeholders.
The standard will take effect for non-public companies for fiscal years, beginning after December 15, 2019 (Calendar year 2020). Early application will be permitted for all organizations.
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If you have concerns about how the new lease standard will affect your entity, contact JPS.
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