What is the new lease standard?
ASU No. 2016-02, Leases (Topic) 842, dramatically changes the way your business will record any new or existing lease. The new standard will significantly impact your financial statements if you lease substantially any asset such as a building, vehicle, or equipment. Under the new standard, you are required to record a right-of-use asset and a lease liability on the balance sheet for each lease and amortize each asset and liability over the life of the lease(s). For more detailed info, read here.
When is the new lease standard effective?
- Public companies: January 2019, Assuming calendar-year-end reporting
- All other entities: January 2022, assuming calendar-year-end reporting
Why do I need to worry about this now?
Because of the significant impact to the balance sheet, your financial ratios and debt covenants may be negatively affected. In addition, you will need to train on new policies and procedures surrounding leases. If you have a large number of leases, you may need to implement software solutions.
Top 5 things business owners need to know about the new lease standard:
- Lessees must now recognize operating lease assets and liabilities on the balance sheet.
- Leases over 12 months – The standard requires right-of-use assets to be added to the assets section of the balance sheet at present value of the related lease obligations and a related lease liability. These changes could make lessees appear significantly more leveraged and cause unprepared entities to violate their loan covenants.
- Sales-leaseback transactions must meet the revenue recognition requirements in ASC topic 606 Revenue from Contract with Customers.
- The lease standard requires an increase in financial statement disclosures. Entities must disclose qualitative and quantitative information, including details about variable lease payments and options to renew and terminate leases.
- Effective dates – You can elect to adopt the lease standard early. Otherwise, it is effective for public companies in 2019. Private companies’ and not-for-profit entities’ financial statements must comply with ASU 2016-02 in 2022, assuming a calendar year-end.
What should I do now and how can Froehling Anderson help?
Talk to your accountant at Froehling Anderson and prepare to have discussions with your banker about what your financial statements will look like and how your debt covenants will be impacted. Froehling Anderson can assist with calculating and recording your leases on the balance sheet, preparing pro forma financial statements to see what the impact will be and discuss the impacts with your banker. With our knowledge and expertise, we can make this transition seamless for you!
