Lessons from Lease Accounting Standards

The US Financial Accounting Standards Board (FASB) new lease accounting standards has brought about many questions for companies that outsource production or logistics, including manufacturers and distributors. Here are some of the key considerations in evaluating supply arrangements to identify any contractual relationships. These relationships can impact bookkeeping and financial statement reporting going forward.

In the past, operating leases were not accounted for on the balance sheet, but the new FASB lease accounting standard requires that all leases with a term greater than 12 months be recognized as a right-of-use (ROU) and lease liability on the balance sheet.

Note: Lease agreements that are 12 months or less are considered short-term and not subject to the new standard.

Finance leases (capital leases) are accounted for in the same general manner as capital leases under existing GAAP.

Operating leases are considered to be any lease that isn’t a finance/capital lease. These are now capitalized on the balance sheet as a ROU asset and a lease liability. There are additional disclosures required for financial statements.

To ease the transition, it’s important to review contractual arrangements on existing leases to facilitate this move to the new standard.

  • Review your compliance requirements. With changes to the financial statement, there may be an impact with debt agreements.
  • Perform an inventory of all existing lease agreements and identify the assumptions necessary to implement the new standard.
  • Updated operational policies may be required to ensure that new and existing leases are recorded correctly. This may include additional resources within your company to implement new policies, update financial statement disclosures and ensure proper recording of lease agreements.

The new FASB lease accounting standards are effective for public companies in 2019 and all other companies by 2020. These standards have a significant impact on businesses from an accounting and reporting standpoint, and preparation for these new standards will be key to a smooth transition. At the July meeting the Financial Accounting Standards Board (FASB) voted to propose delaying the effective date of this standard one year for privately held companies and nonprofit organizations.  For private companies the effective date is no period beginning after December 31, 2020 (2021 FYE).

Our Audit & Assurance group understands the impact this may have on your business and can assist you in accurate accounting in accordance with the FASB lease accounting standards. Contact Luke Kinzer at 256-533-1040 for information or to schedule a time to discuss your needs.