With the intent to improve greater transparency and faithfulness in financial reporting about lease transactions, the Financial Accounting Standards Board (FASB) issued an Accounting Standards Update (ASU) on February 25, 2016 that will affect companies and organizations that lease assets such as real estate, airplanes, and manufacturing equipment.
Under the new rules, leases with a maximum term longer than 12 months will be capitalized on the balance sheet. This applies to not just new leases but existing ones. There will be no ‘grandfathering’ of existing leases. This results in a majority of leases that have been off the balance sheet coming on the balance sheet.
Although the changes will not take effect until 2018 for public companies and 2019 for non-public entities, businesses are already taking proactive steps in negotiating new leases and renegotiating existing ones. In order to control the impact of the changes, actions that can be taken now include the following.
- Assess and strategically evaluate your lease portfolio to determine how they will be accounted for under the new rules.
- Consider renegotiating leases even if they are not up for renewal.
- Concentrate on reducing the difference between the lease’s liability and the associated “right of use” asset. If these items are out of balance the more distorted the impact will be on the balance sheet and shareholder equity.
- Reach out and connect with the right individuals who can help assist you to strategize and transition to these changes.
Mueller is committed to keeping you up-to-date on accounting matters that affect you. If you would like more information on this new standard, please contact Brian Sullivan at firstname.lastname@example.org or 847-649-8846.