Posted on 05/25/2016

The new FASB and IASB’s lease accounting standards are coming. Are you ready?

These changes could make a big difference for your company, with possible implications including a bigger compliance burden and a material change on corporate financial statements, potentially bringing billions of dollars on corporate balance sheets, modifying financial ratios, and impacting debt covenants.

With the upcoming FASB lease accounting standards, leases will be recognized as a Right-of-Use Asset (ROU Asset), and nearly all leases will be recorded on the Balance Sheet. Operating and Capital leases will be classified as Type A (mostly assets) or Type B (mostly property leases). Classification of the lease will look at how much of the underlying asset was consumed during the lease term. The classification will determine the method for recognizing lease revenue and expense. For lessees, the recognition of lease-related assets and liabilities, as well as changes to the timing of lease expense recognition, could have significant financial reporting and business implications.

Prepare for Change

It’s important to understand now what your current lease terms are and how they might be affected. Not only will the new standards apply to future leases, but they will also be applied to those leases existing at the time of the change.

Here are some suggestions to help your organization get ready for FASB:

For current leases:

  • Know if your leases will be affected
  • Know how your leases are currently categorized
  • Know the lease start date and which options you have a significant economic incentive either to extend or terminate
  • Know your discount rate for calculating Net Present Value (NPV)
  • Know your future payment obligations
  • Know your past payment history
  • Keep track of modifications that happen between now and the commencement date: term length, payment amount, index or rate, impairments, and lease hold improvements

For future leases:

  • Know the lease term
  • Know what category the lease falls into
  • Know if you lease contract contains multiple assets
  • Know your discount rate for calculating NPV
  • Know your future payment obligations
  • Know the amount of initial direct costs and incentives
  • Keep track of modifications that happen between now and the commencement date: term length, payment amount, index or rate, impairments, and lease hold improvements

Get help from the experts to transition smoothly to the new lease accounting standards.