The new lease standards set forth by the Financial Accounting Standards Board has far-reaching and complex impacts for all companies. This new standard was approved in 2016 but the effective date of the has been pushed back several times due to the significance of the standard on companies’ financial statements. Publicly traded companies have already implemented the standard while delays due to COVID-19 have pushed implementation for most privately held companies to calendar year 2022 —this means companies have only about a year left to prepare.
But the new standards are set to take place in 2022, so now is the time for companies to consider how they will update their balance sheets accordingly.
But first, a little background is necessary …
Under the new standards, private and public companies are required to record most of its leases on the balance sheet. In other words, most leases of equipment, office space, or automobiles will appear as an asset and a liability on the Company’s balance sheet. Whereas under the old standards, companies could record some leases as an expense, the new standards mean that most companies with a lease will have liabilities added to its financial statements upon implementation.
Depending on the size of the companies’ leases, this can change a balance sheet to the tune of millions of dollars.
How should companies implement the new standard?
Companies have to evaluate each of their contracts to determine whether a lease is embedded in the contract and to update their accounting records accordingly.
Depending on the number of contracts your company has, this can be a cumbersome task. Making it even more complicated is this: Various aspects of the lease terms can influence how the lease’s accounting. Is there a side contract? A pricing difference? A discount? How long is the lease? How much did you pay for the leased items? The answers to these questions can impact how the entire lease is represented on a balance sheet.
Keep this in mind: When you do implement the new standard, you will have an apples-to-oranges comparison when considering the prior year’s balance sheet. Some companies might want to restate their historical balance sheets so that they can more easily compare year-to-year performance. This provides more accurate reporting but will require additional effort by the company.
This is still a basic introduction to a complex series of new requirements. To make sure you are in compliance from the start, please give us a call to see how we can help you get ready for the new lease standard.