On February 25, 2016, The Financial Accounting Standards Board (FASB) issued Accounting Standard Update (ASU) 2016-02 Leases (Topic 842). It is real, and for many companies, the changes are going to have HUGE implications on your balance sheet.Â
Here is what we mean in a nutshell:
- In the past, the assets and liabilities related to “capital†leases were reflected on the balance sheet while “operating†leases were not. Now, substantially all leases with over a one-year term will appear on the balance sheet with no changes to the income statement presentation:
- Balance sheet:
- Right of use asset
- Liability for lease payments
- Income statement
- Capital leases continue to report “depreciation and interest expenseâ€
- Operating leases continue to report “lease expenseâ€
- Balance sheet:
- The effective date for nonpublic entities is for fiscal year beginning after December 15, 2019 (i.e. calendar year 2020)
- However, the new standard is retrospective so any prior years presented will have to be restated
- Things to think about:
- Consider a single year presentation in the year of implementation to minimize footnote disclosures
- The impact on debt covenant ratios in loan agreements
- Upcoming lease negotiations
- Start planning now!
What does all of this really mean for your business?
Please contact Laurel Shelton or Dean Willingham to get a deeper understanding of the scope of the new requirements. While the effective day appears to be far in the distant future, it’ll require significant time to assess your situation and develop an effective adoption plan designed to minimize the financial impact the changes may have on your bottom line. We look forward to the opportunity to proactively work with you.
