One loud giant thud is the sound you’d hear if you printed out all 485 pages of the new lease accounting standard and threw it on your desk.
Multiple giant thuds. That’s what we’ll all be hearing when trillions of dollars worth of leases land on many companies’ balance sheets in 2019. That’s when public companies will need to bring right-of-use assets and associated obligations onto the balance sheet and out of the footnotes. (Privately held companies get an extra year to comply.) The full effects are yet to be known, but two things are known for sure: balance sheets will get heavier and many questions for CFOs will follow.
In the works for over a decade, the new standard issued by the Financial Accounting Standards Board in February will affect almost every company. Lessees will feel it the most. As I mentioned in a recent article in ComplianceWeek (sub. required), the new standard will be “pretty pervasive.” The rule addresses leases of property and equipment that are 12 months or longer.
Many companies will be bringing their operating leases onto their balance sheets, which will make them appear more leveraged than under historical GAAP. The new guidance will lead to “a more faithful representation of an organization’s leasing activities,” according to FASB Chair Russell G. Golden.
One of the most common examples given while standard-setters ironed out the details of the new rule was the leasing of airplanes. For aircraft leased for several years but not for their entire “life,” airlines did not have to show their ongoing obligation on their balance sheet. Some viewed this allowance of off-balance-sheet reporting as misleading (this is not just an issue for airlines: Amazon will have to factor in the new rule as it moves forward with its reported plans to lease 20 Boeing 767 planes).
Although it will be awhile before we see the full extent of the standard’s changes in publicly filed financial statements, CFOs are going to have to be ready to answer some questions about how it will affect their company and how they’re going to deal with it. For now, companies will need to add it to their new accounting pronouncement disclosures. And then there’s the detailed work ahead in figuring out what leases the company has and evaluating them.
In the months ahead, companies will need to thoughtfully review their current lease agreements and consider whether any will need to be reclassified under the new rule. It may need to be a cross-functional effort. Companies may want to revisit the wording in some contracts. They may notice that some debt covenants could be affected. There’s some time to get ahead of the changes—but only if the work is put into it now.
Feel like 2019 is a ways off? Some long-term leasing agreements you have in play now could be affected as the standard requires modified retrospective adoption. Comparative financial statements will accompany the reports when it comes time to comply with the rule. And by then the time to transition to this new way will seem to have flown by.
Diana Gilbert has been a member of the RoseRyan dream team since 2008 with almost 30 years of professional experience. Frequently tapped for her insights by Compliance Week, Diana excels at technical accounting, revenue recognition, SOX/internal controls, business systems and process improvements.