Prepare for New Accounting Standard Affecting Leases
A proposed overhaul of the current lease accounting standards by the Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB) will significantly affect many organizations’ financial statements and other aspects of their operations. While waiting for a final standard, you can take steps now to begin to assess the implications around financial statements, data requirements, technology, and process changes.
Under existing standards, leases of equipment and other assets that meet certain criteria are generally classified as “operating leases,” and do not appear on the balance sheet. The proposed new standard, which was released for comments as an exposure draft on May 16, 2013, would require lessees to include all leases that extend for more than one year on their balance sheet. The new rules would also apply to existing leases, since no “grandfathering” exemptions are currently being considered.
In the latest exposure draft, FASB and IASB maintained (and will not likely change) their position that all assets acquired under long-term lease agreements are to be recorded on the balance sheet as “right-to-use” assets, with a corresponding “lease liability” recorded. Therefore, organizations that use a significant amount of leasing should examine how their financing strategies and expense recognition would be affected if the proposed standard is implemented.
Stay tuned for more information on how you can prepare for the new accounting standards.