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The rules for reporting leasing transactions are changing. Though these changes have been delayed until 2021 for private companies (and nonprofits), it\u2019s important to know the possible effects on your financial statements as you renew leases or enter into new lease contracts. In some cases, you might decide to modify lease terms to avoid having to report leasing liabilities on your balance sheet. Or you might opt to buy (rather than lease) property to sidestep being subject to the complex disclosure requirements.<\/p>\n
Updated standard<\/strong><\/p>\n In 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No.\u00a02016-02, Leases<\/em>. The effective date for calendar year-end public companies was January\u00a01, 2019. Last fall, the FASB deferred the effective date for private companies and not-for-profit organizations from 2020 to 2021.<\/p>\n The updated guidance requires companies to report long-term leased assets and leased liabilities on their balance sheets, as well as to provide expanded footnote disclosures. Increases in debt could, in turn, cause some companies to trip their loan covenants.<\/p>\n Updated lease terms<\/strong><\/p>\n The updated standard applies only to leases of more than 12\u00a0months. To avoid having to apply the new guidance, some companies are switching over to short-term leases.<\/p>\n Others are incorporating evergreen clauses into their leases, where either party can cancel at any time after 30\u00a0days. An evergreen lease wouldn\u2019t technically be considered a lease under the accounting rules \u2014 even if the lessee renewed on a monthly basis for 20\u00a0years. This might not be the best approach from a financial perspective, however, because the lessor would likely charge a higher price for the transaction. There\u2019s also a risk that short-term and evergreen leases won\u2019t be renewed at some point.<\/p>\n Lease vs. buy<\/strong><\/p>\n The updated standard is also causing organizations to reevaluate their decisions about whether to lease or buy equipment and real estate. Under the previous accounting rules, a major upside to leasing was how the transactions were reported under Generally Accepted Accounting Principles (GAAP). Essentially, operating leases were reported as a business expense that was omitted from the balance sheet. This was a major upside for organizations with substantial debt. Under the updated guidance, lease obligations will show up as liabilities, similar to purchased assets that are financed with traditional bank loans. Reporting leases also will require expanded footnote disclosures.<\/p>\n The changes in the lease accounting rules might persuade you to buy property instead of lease it. Before switching over, consider the other benefits leasing has to offer. Notably, leases don\u2019t require a large down payment or excess borrowing capacity. In addition, leases provide significant flexibility in case there\u2019s an economic downturn or technological advances render an asset obsolete.<\/p>\n Decision time<\/strong><\/p>\n When deciding whether to lease or buy a fixed asset, there are a multitude of factors to consider, with no universal \u201cright\u201d choice. Contact us to discuss the pros and cons of leasing in light of the updated accounting guidance. We can help you take the approach that best suits your circumstances.<\/p>\n \u00a9 2020<\/em><\/p>\n <\/body> The rules for reporting leasing transactions are changing. Though these changes have been delayed until 2021 for private companies (and nonprofits), it\u2019s important to know the possible effects on your financial statements as you renew leases or enter into new lease contracts. In some cases, you might decide to modify lease terms to avoid having […]<\/p>\n","protected":false},"author":3,"featured_media":14522,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[13],"tags":[],"class_list":["post-14523","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-aa"],"_links":{"self":[{"href":"https:\/\/www.sfw.cpa\/news-and-guides\/wp-json\/wp\/v2\/posts\/14523","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.sfw.cpa\/news-and-guides\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.sfw.cpa\/news-and-guides\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.sfw.cpa\/news-and-guides\/wp-json\/wp\/v2\/users\/3"}],"replies":[{"embeddable":true,"href":"https:\/\/www.sfw.cpa\/news-and-guides\/wp-json\/wp\/v2\/comments?post=14523"}],"version-history":[{"count":0,"href":"https:\/\/www.sfw.cpa\/news-and-guides\/wp-json\/wp\/v2\/posts\/14523\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/www.sfw.cpa\/news-and-guides\/wp-json\/"}],"wp:attachment":[{"href":"https:\/\/www.sfw.cpa\/news-and-guides\/wp-json\/wp\/v2\/media?parent=14523"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.sfw.cpa\/news-and-guides\/wp-json\/wp\/v2\/categories?post=14523"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.sfw.cpa\/news-and-guides\/wp-json\/wp\/v2\/tags?post=14523"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}
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