Recent Standards Give Lease Accounting a Brand New Look

If you hadn’t already noticed, 2016 looks to be a popular year for announcements about upcoming changes in regulations. With new revenue recognition standards set to begin in the next few years, there is another new release your company should definitely know about: the lease accounting standards.

Launched by the International Accounting Standards Board (IASB) and the Financial Accounting Standards Board (FASB), the long-awaited leasing standards will make a bigger impact than many expect. These standards will bring leases onto company balance sheets for the first time, creating more transparency about a company’s financial condition by including lease obligations.

Moving into the 21st Century

According to the IASB, companies around the world have around $3.3 trillion of leasing commitments, where over 85 percent do not appear on balance sheets. The FASB and IASB hope the new standards will help lease accounting run much smoother, transforming the way companies keep track of all the equipment and real estate they use to run their business.

IASB chairman Hans Hoogervorst says these new requirements help in “ending the guesswork involved when calculating a company’s often-substantial lease obligations,” helping to provide more transparency on companies’ lease assets and liabilities.

Some Key Differences

While both standards have the same goal, FASB voted to issue their own leasing standard and expect to release it on February 25, 2016. It will be effective for public companies beginning in 2019 and for private companies starting in 2020.

IASB recently issued their leasing standard, also known as the International Financial Reporting Standard (IFRS) 16 Leases, which classifies all leases as financial leases (also known as capital leases), potentially eliminating the prior distinction of operating leases. The IFRS leasing standard will be effective starting January 2019, allowing companies to apply early.

The most significant difference between both standards is that FASB’s standard will require a dual approach for expensing amounts. FASB plans to keep the separate distinction between operating leases and financial/capital leases. Which means for operating leases, companies will recognize lease expenses in income statements on a straight-line basis. Whereas, for other leases, companies will depreciate lease assets separately from interest on lease liabilities.

Who’s impacted?

So who’s getting the short end of the stick? According to Accounting Today, companies with the largest operating lease obligations are expected to be most affected by the new capital lease accounting standards.

Companies need to start preparing now. This is especially true for bigger companies, such as Walgreens, McDonald’s and Wal-Mart, that have a large amount of leases.  In addition, many U.S. multi-national companies will have to put in some more work and effectively run two sets of books to be ready and compliant for 2019.

Both lease accounting standards, with their independent expense-accounting methods, can potentially create some opportunities for CFOs. Executives whose businesses have significant real estate portfolios can use the new standards to help them develop a centralized view of all assets, clarify any cash flow, debt or liquidity positions, and link benefits with expected payments.

If you think your company will be impacted by the lease accounting standards or you wish to plan early, contact me or another accounting professional for help with implementing the new standards.