Its on the horizon, but the new lease accounting standard is a big change. How will it affect you? You should think about it now!
In February, the Financial Standards Accounting Board (FASB) quietly issued a significant new
Accounting Standards Update that will potentially impact companies’ financial reporting and working capital, as well as the covenants underlying their bank loans and lines of credit.
FASB Update 2016-02 was issued to increase conformity with international accounting rules. It will enhance transparency and comparability by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements.
For operating leases, it requires a lessee to recognize a right-of-use asset and a lease liability at the present value of the lease payments on the balance sheet. As a result, there will be a liability on the balance sheet that wasn’t there in the past. Even though the economics remain the same, the current maturity of the lease obligation could negatively affect working capital, as well as a company’s potential valuation.
Banks will be impacted, too, since most lending arrangements include covenants specifying requirements around working capital, leverage ratios and debt service covering ratios. So there’s a lot to consider about this new Standard.
Fortunately, there’s time to prepare. The Update takes effect in fiscal years beginning after December 15, 2018 for public business entities and beginning after December 15, 2019 for other entities.
If you have any questions about this important change, please feel free to contact LWBJ.