Lease Accounting Standard Issued – Consider its impact to your Balance Sheet

May 5, 2016|Karin Gale, Bill Heinrich

In February 2016 the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2016-2 Leases (Topic 842). ASU 2016-2 is effective for nonpublic companies and organizations (as defined) for fiscal years beginning after December 15, 2019, which means that for a calendar-year company it would be effective January 1, 2020. For public companies, ASU 2016-2 is effective for fiscal years beginning after December 15, 2018, which means that for a calendar-year public company it would be effective January 1, 2019.

Under this standard, essentially all leases, including leases for real estate, will be recognized by lessees on the balance sheet though a right-of-use (ROU) asset and corresponding lease liability. This includes all operating leases with lease terms in excess of 12 months. Generally the lease term is the non-cancellable period of the lease, together with periods covered by an option to extend the lease if the lessee is reasonably certain to exercise the option, as well as other factors.

Accounting by the lessor is largely unchanged from current GAAP.

Even though there is some time before the standard’s effective date, it is important to be cognizant of the impact it will have on your balance sheet and various financial ratios that are measured by any debt agreements. We encourage you to review your existing operating leases in light of your current and future debt agreements and discuss their impact with your banker in advance of the effective date.

Schenck will continue to follow updates on this standard and provide additional implementation guidance. If you have questions, please contact a Schenck professional at 800-236-2246.

Karin Gale, CPA, CM&AA, shareholder, serves as the lead business advisor to middle market businesses and is a leader of Schenck’s Manufacturing industry team.

Bill Heinrich, CPA, shareholder and director of quality control, has experience providing audit, accounting and consulting services for a wide variety of businesses. His emphasis has been in the area of technical accounting support in financial statement preparation and dealing with internal quality control issues.

Tags: Accounting