In February 2016, the Financial Accounting Standards Board (FASB) issued an Accounting Standards Update (ASU). The update will change the way that leases are reported, and will likely have significant accounting, operational, and contractual impacts.
The ASU will require more transparency in regards to the reporting of leasing transactions. Specifically, under the new standards, all leases with lease terms of 12+ months will need to be recognized on the balance sheet, regardless of their classification. Previous guidance allowed off balance sheet classification of operating leases.
The ASU is effective for public companies for fiscal years and interim periods within fiscal years beginning after December 15, 2018. For all other organizations, the ASU is effective for fiscal years beginning after December 15, 2019 and interim periods within fiscal years beginning after December 15, 2020.
Some have considered the updates to be negative in that they will require more reporting of financial leasing and may be time consuming to implement and maintain. However, for lenders and other financial statement users, the new updates create a more accurate and transparent representation of an organization’s financial status.
The most notable impacts to your organization will likely be in the following areas:
What action can you take?
It’s important to be proactive and to understand how these changes will affect you, your business, and your future financial decisions. If you have any concerns about the new leasing accounting standards updates, contact Chris Gorans at firstname.lastname@example.org or 651-255-9304.
Chris Gorans is an audit and accounting manager 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.More posts by Chris Gorans