Posted on 05/25/2016

The FASB and IASB’s lease accounting changes are coming. Is your company ready?

The 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 lease accounting changes, 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 existing at the time of the change.

Here are some suggestions we have to help your organization get ready for the change:

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

For an in-depth look into the upcoming FASB changes, Click here to view our presentation from Insights 2016.


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