August 27, 2018
Most business owners know that they must comply with the new lease accounting standard (
ASU No. 2016-02, Leases. Topic 842
) issued by the Financial Accounting Standards Board (FASB) in February 2016. It was adopted to address the concerns of sureties, bankers, investors, and other users of financial statements on lease obligations.
These standards are effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years, for any of the following:
- A public business entity
- A not-for-profit entity that has issued, or is a conduit bond obligor for, securities that are traded, listed, or quoted on an exchange or an over the-counter market
- An employee benefit plan that files financial statements with the U.S. Securities and Exchange Commission (SEC)
For all other entities, the new lease accounting standards are effective for fiscal years beginning after December 15, 2019, and interim periods within fiscal years beginning after December 15, 2020. Early application of the standards is permitted for all entities.
Generally, all entities that lease assets (lessees) such as real estate, equipment, or vehicles must be in compliance with the ASU. It requires that capital (finance) and operating leases are recognized on the balance sheet. The “right-of-use” value of property or equipment must be recorded as an asset and the present value of scheduled lease payments as a liability. Right-of-use assets include initial direct costs (legal fees, advanced payments, lease incentives, etc.).
While this ASU is much more complicated than described above, the purpose of this alert is to point out the numerous benefits companies may realize, instead of discussing the particular compliance requirements. Too many businesses are focused on the cost of putting all of the procedures in place prior to the effective date. Knowing how they may benefit may help with the implementation process.
As discussed in an article entitled “
Unlock the Hidden Benefits of Lease Accounting Rules
” by Bill Maloney, Udit Sharma and Patrick Garrett published in the July 23, 2018, issue of CFO: “If the implementation is approached strategically and thoughtfully, the inevitable byproduct is a centralized and efficient lease management structure that yields significant benefits to companies in providing greater data visibility, more robust governance, and increased resource optimization.
The main benefits the authors highlight include:
- Faster, Better Decision Making. A centralized lease management system will allow companies to analyze their lease spend. Information on lease payments, terms, vendors and locations will be readily available. This will give management the opportunity to monitor equipment leases, negotiate better terms, develop company standards for each type of lease, and better understand lease obligations.
- Increased Control Over Spending. Management will have complete data on their inventory of lease assets. Information will be available on leases that are not in compliance with company standards. Inefficiencies will be identified, as well as individuals that are not following established policies.
- Improved Cost Management. Bad leases have a long-term impact on organizations. Reliable information is needed to analyze the cost vs. the benefit of a lease or buy decision. Since local personnel may not have information on company procurement policies, it may be difficult to take advantage of economies of scale when leasing equipment. A centralized lease management system will give organizations a competitive advantage. Lease terms can be negotiated that are “globally optimal” instead of “locally suboptimal.”
According to the authors, companies that implement the new lease accounting standard with a long-term view toward improving processes and identifying efficiencies must embrace three critical factors to successfully realize these ongoing operating and cost-saving benefits:
- Cross-team Collaboration
- Business Process Changes
- Technology System Investments.
Feel free to call any member of our team at 610-828-1900 with questions on how to comply with ASU 2016-02. You can also contact Matt Boland, director - accounting & assurance at
[email protected]
or myself at
[email protected]
. We are always happy to help.
