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How the New Lease Accounting Standard Will Impact Businesses

How the New Lease Accounting Standard Will Impact Businesses

Author: Thomas Vick/Tuesday, May 22, 2018/Categories: SNI Companies, SNI Financial, Financial Staffing, Industry Trends, SNI Certes, Financial Staffing, Industry Trends, Accounting Now

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In early 2016, the International Accounting Standards Board (IASB) and the Financial Accounting Standards Board (FASB) issued their new lease accounting standard, taking effect January 1, 2019. Before reading any further, let’s address the first question: what is the new lease accounting standard? In short, this standard will require organizations, public and private, to be more transparent about their lease-related assets and liabilities, also disclosing all leases greater than 12 months as liabilities on their balance sheets.

Currently, there are two types of leases – operating and capital. Operating leases are only recorded on the Income Statement as rent expense, whereas the liability and related asset for capital leases are reflected on the Balance Sheet. Until recently, companies were not obligated to record all leases as capital and only disclose operating leases in a footnote.

At the end of this year, any lease with a life greater than 12 months must be recorded and disclosed as a capital lease. This change is impacting all businesses that engage in leased assets with the majority of that effort impacting finance, accounting and procurement departments. With many moving pieces on this new standard, here are two areas where companies should be focused in order to prepare for this change:

Track Every Asset
As mentioned, all leases are now to be recorded and treated as liabilities. For example, airlines now will need to list every plane and vehicle they use regardless of ownership. In order to get prepared for this shift, companies should start the reorganization of their lease information as soon as possible. The challenge is this is likely a much more complicated task than anticipated as organizations will need to capture a great deal more data than previously necessary for leases previously treated as operating leases. Luckily, there are analytical programs that have been updated and put in place to help retrieve data and remedy inconsistencies. Taking action here will put companies ahead of the game.

Identify Proper Systems
Once all lease information is reconciled and accurate, new systems should be put in place to ensure these efficiencies continue moving forward. There are emerging options for businesses to incorporate software solutions into the daily administration of leases, providing the accounting and finance managers with adequate resources needed for reporting. Additionally, most systems are designed to fulfill specific purposes, automatically preforming needed capabilities to comply with the new lease accounting requirements.

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Thomas Vick
Thomas Vick

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