When the new lease accounting standard, Accounting Standards Codification (ASC) 842, is implemented, all leases will have to be reported on the balance sheet. A ‘right of use’ asset and a lease liability will be added to all company balance sheets.
Under the new standard, only capital leases were reported on the balance sheet - operating leases were reported in a footnote disclosure of a company’s financial statements. The new lease standard has a proposed delayed implementation date of January 1, 2021, for calendar year-end, privately held companies.
How will the new lease accounting standard affect your business?
The reporting of the lease ‘right of use’ asset, while it offsets any lease liability, will still affect certain financial ratios used by banks and other financial institutions. This is because a portion of the lease liability is considered current (payable within 1 year) but the full amount of the ‘right of use’ asset is considered non-current. This situation skews the company’s ability to pay current obligations.
What can you do to be proactive?
If you have financial reporting requirements, you should consider meeting with your banker to discuss options, including:
- Changing your company’s financial reporting method from GAAP to another financial reporting framework (e.g. income tax basis or cash basis). This would allow the company to skip the implementation of the standard.
- Consider if the bank would allow for a GAAP departure for this standard. Again, this would allow the company to skip this standard’s implementation.
- If GAAP financials are a must and a departure is not an option, review your financial covenants with your banker. Consider modifications to the financial ratio requirements in order to stay compliant (and avoid costly waiver fees).
If you determine that your company has to implement the lease standard and are looking for help, our AccountLease™ team can assist you with the transition.
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