Redpath Insights

Reminder of Updates to Lease Accounting Standards

by Chris Gorans, CPA

Here's a Redpath reminder. The Financial Accounting Standards Board (FASB) issued an Accounting Standards Update (ASU) back in February of 2016. The changes to lease reporting will have meaningful accounting, operational, and contractual impacts.

Important Updates to Lease Accounting StandardsLeasing transactions will require greater transparency of reporting. Whatever their classification, you will need to recognize all leases with terms of 12+ months on the balance sheet. Previously, it was required for operating leases to use off-balance sheet classification.

The ASU is effective for:

- public companies for fiscal years and interim periods within fiscal years beginning after December 15, 2018, and

- other organizations for fiscal years beginning after December 15, 2019, and interim periods within fiscal years beginning after December 15, 2020.

The biggest impacts on your organization could include:

- your existing loan covenants, e.g. it could adversely affect both leverage ratios and capital expenditures.

- lease vs. buy decisions. Being off the balance sheet was a benefit of leasing in the past. There may no longer be any benefit to leasing an asset instead of buying it outright.

What can you do next?

- Contact your lenders as soon as possible to discuss the impact of the ASU on your loan covenants.

- Contracts, payments, terms, and other lease information should be identified, collected, and documented. The most relevant information to collect regards leased assets that will exist when the standards come into effect.

- You may also want to contact your CPA to understand the full picture of how the ASU might affect your financial statements.

It’s important to be proactive! These changes may affect you, your business, and your future financial decisions. If you have any concerns surrounding these updates, get in touch with Chris Gorans at cgorans@redpathcpas.com, or 651-255-9304.

Chris Gorans, CPA

Chris Gorans, CPA

Chris Gorans is an audit and accounting director in the commercial audit and review service areas at Redpath and Company. He has provided audit, review and benefit plan audit services to closely held businesses in the manufacturing, distribution, and construction industries since 2008.