The new FASB lease accounting standard will likely need to be addressed sooner than many private businesses realize. For privately held calendar-year-end companies it takes effect in January 2020. In a June 27, 2017 article in Accounting Today, Michael Cohn writes, “[A] survey, by PricewaterhouseCoopers and CBRE Group, found that 23 percent of companies have yet to begin the initial adoption process of the leasing standard, while 47 percent of organizations that started implementation of the leasing standard reported the effort is bigger than they had expected.”
Private companies affected by this standard must bear in mind that if they typically issue comparative financial statements, FASB requires that the standard be applied retroactively to the preceding year – that means 2019, just over one year from now. Early adoption, which is permitted, may be the most proactive approach to ensure your accounting department is prepared for the new reporting requirements.
FASB, in its continued mission to improve transparency in financial reporting, issued Accounting Standards Update (ASU) 2016-02 to bring off-balance sheet lease rights and obligations, previously relegated to the financial statement disclosures, front-and-center onto the face of the financials. The standard has re-characterized these arrangements whereby a lessee’s contractual access to leased property represents an asset, and the related future obligation to pay for that right is debt. The new treatment shines a stronger light on lease rights and obligations as they relate to the financial health of an entity, which may add new metrics in negotiating credit terms and meeting financial covenants. While all businesses with long-term leases will be required to implement the new standard to comply with GAAP, certain industries will feel the impact more acutely given how entrenched their operations are in leasing arrangements: retail, manufacturing and distribution, construction, and restaurants, to name several.
It is not too early to start preparing. Tackling the challenges of a smooth adoption must include instituting internal processes to accurately gather lease data, monitor lease arrangements on a timely basis, and appropriately report lessee assets and liabilities.
If you would like more details about the new lease accounting rules, or have questions about how ASU 2016-02 may affect your business, please contact your accounting professional at DiSanto, Priest & Co.