Bookkeeping Pitfalls

Lease Accounting: Thumbs Up or Down?

In February, the FASB published its new standard on lease accounting. It requires companies that lease assets for terms of more than one year to report on their balance sheets right-to-use assets and corresponding liabilities over the lease term, regardless of how they are classified for income statement and tax purposes. It also calls for lessees to expand their footnote disclosures about the amount, timing, and uncertainty of payments they make for the lease agreements.

Current practice

Under existing GAAP, companies record on their balance sheets only lease obligations that are akin to financing arrangements (also known as finance or capital leases). In practice, few leases appear on company balance sheets, because companies are given significant leeway to structure deals to look like rentals (also known as operating leases). For some companies, such as airlines that lease their fleets of planes or retail chains that rent storefronts, operating lease payments make up significant financial obligations.

Thumbs up

For decades, many investors have complained that current practice makes lessees appear more financially secure than they really are. Therefore, overall, investors and analysts are applauding the FASB’s move to require companies to report all leases on their balance sheets.

Thumbs down

Businesses worry that the new lease standard’s benefits do not offset its significant implementation costs. The lease standard is scheduled to become effective for publicly traded companies in 2019 — just a year after the broad-reaching revenue recognition standard goes into effect. The net result will be a major amount of stress on controllers, their financial reporting teams and corporate reporting systems.

Next steps

We can work with you to implement both standards and plan for any adverse consequences that may arise, such as loan covenant violations or credit downgrades.

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