The new leasing standards
If your organization leases a significant amount of property or equipment disclosed as operating lease commitments, you’ll likely experience a huge impact to your upcoming financial statements in the next few years. For the first time in decades, the lease accounting standards are being revised to create more clarity and transparency.
Currently, firms are required to report capital leases on their balance sheets while leaving operating leases out — meaning a portion of their debt can go unreported, positively impacting debt-to-equity ratios. However, changes are coming in 2019 for public companies and 2020 for private companies.
The leasing standards changes include:
- Which leases to report. All leases longer than one year must be reported on balance sheets.
- Redefining lease types. Under the new standards, all leases will fall into one of three categories:
- Short-term: one year or less
- Financing leases: term is for a major part of the economic life or value of the asset
- Operating leases: term is not for a major part of the economic life or value of the asset
Examples of new leasing standards’ impact
Consider the following sample leasing standards scenarios.
- Grouchy’s Pizza, a statewide pizza chain, decides to make delivery service available and wants to lease its fleet to keep its debt-to-equity ratio intact. With the new standards, the leases will be reported as operating leases — now Grouchy’s owners have to determine if buying the fleet will be the best option in the long run.
- Do-Gooders Recycling, an industrial recycling plant, is in negotiation for a 14-month contract with an apartment complex chain to recycle all of its old refrigerator units. Do-Gooders will need to lease a large grinding machine to scrap the metal in the old units. Should Do-Gooders revise the contract to an 11-month agreement to keep the short-term lease debt off of the balance sheets?
- Smiley Dental’s old X-ray unit needs to be replaced soon. The dental office owner is unsure if it makes sense to buy and finance the new $50,000 unit or lease and report it as a financing lease on her balance sheets.
Rehmann can help you get up-to-date with the new leasing standards
Your Rehmann advisor is ready to help you prepare for the reporting required of the new leasing standards. Reach out today to:
- Choose from leasing transition options
- Come up with creative ways to minimize new tax burdens
- Prepare for the impact the new leasing standards may have on other business decisions, such as retirement and/or succession planning