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New Lease Accounting Standards and What it Means for Your Business

Organizations that lease assets will now have to follow new accounting standards regarding those leases.  This is the result of a process that has been ten years in the making. In 2006, the Financial Accounting Standards Board (FASB) embarked on a joint project with the International Accounting Standards Board (IASB).

Following 15 public roundtables, three documents issued for public comment and over 200 meetings with preparers and users of financial statements, FASB issued an Accounting Standards Update (ASU) designed to improve financial reporting regarding leasing transactions.

Who’s Affected?
The ASU, which was issued on February 25, 2016, applies to all companies and organizations that lease assets such as real estate, construction and manufacturing equipment, airplanes and ships.  This includes public and private companies as well as nonprofit entities.

The accounting for organizations that own the assets being leased will remain largely unchanged.

How is the New Standard Different?
Under the new guidelines, lessees will be required to recognize on their balance sheet the assets and liabilities for leases with lease terms of more than 12 months.

Consistent with current Generally Accepted Accounting Principles (GAAP), the recognition, measurement and presentation of expenses and cash flows arising from a lease depends on its classification as a capital lease or operating lease.  Current GAAP requires that only capital leases be recognized on the balance sheet, however the new ASU requires both capital and operating leases to be recognized on the balance sheet.

The new standard also requires disclosures to help investors and other financial statement users better understand the amount, timing and uncertainty of cash flows arising from leases.  These disclosures include qualitative and quantitative requirements, providing additional information about the amounts recorded in the financial statements.

Benefits of the New Lease Accounting Standards
The FASB changes are the result of requests from investors and the U.S. Securities and Exchange Commission to deal with one of the largest forms of off-balance sheet accounting.

Supporters of the ASU believe the new standards will provide more transparency of a lessee’s obligations from leases and result in fewer opportunities for organizations to structure leasing transactions to achieve a particular outcome on the balance sheet.

When do the New Standards Take Effect?
For public companies, the ASU takes effect for fiscal years, and interim periods within those fiscal years, starting after December 15, 2018.  For all other organizations, the ASU is effective starting one year later on December 15, 2019.  Early application will be permitted for all organizations.

Most Feel Unprepared
If you feel a bit overwhelmed by these new standards, you are not alone.  Accounting Today recently reported the results of a survey by Deloitte and it’s clear that many industries believe they are currently unprepared to comply.  Over 61% of respondents in retail and distribution expressed concerns with the automotive sector coming in at just under 60%.  Other industries where over 50% of respondents anticipate compliance difficulties include industrial manufacturers, health care providers, makers of consumer products and travel, search engine optimization companies, hospitality and leisure.

Accounting Today also reports that only 15% of financial and accounting professionals who were polled expect compliance to be easy.  The top concern regarding implementation is the collection of data on all organizational leases in a centralized repository.  That challenge was mentioned by more than 33% of respondents. Instituting reporting processes to evaluate quarterly adjustments to the balance sheet was a worry for roughly 20%.

It is not too early to begin dealing with these new lease accounting standards.  Many publicly traded companies have already announced that they will spend the second half of 2016 working on compliant internal processes.

If you have questions concerning the way the ASU will affect your business, contact your accounting professional at Herbein + Company, Inc.