“ The balance sheet will look a bit different. Other than that, what is the impact to companies? It’s actually pretty huge – not so much from a financial statement perspective, but the actual administrative burden that they have to now take on. There’s a fair amount of accounting involved with figuring out what the value is of those leases.”
The new leasing standards came out in 2016, so the topic has been on the table for several years now. But implementation is finally here. In this episode of Savvy & Sensible, Albin, Randall & Bennett (ARB) principal, David Jean, and ARB senior audit manager, Gisele Couturier, discuss the new standards, the implementation timeline, and how business owners can prepare for a smooth transition.
For non-public companies, the new leasing standards are effective for fiscal year ends beginning after December 15, 2021. For calendar year companies, that means the new standards became effective on January 1, 2022. Under the new standards, operating leases, which were previously only disclosed in the footnotes, move to the balance sheet as a right-of-use asset with an offsetting lease liability. The new standards extend to related-party leases. However, short-term leases, which (for this purpose) are those with terms of 12 months or less and no renewal options, do not have to be capitalized on the balance sheet.
Implementing the new leasing standards can be complex. Determining what constitutes an actual lease isn’t always straightforward. And because evaluating leases and determining the associated assets and liabilities is performed on a lease-by-lease basis, it requires a significant time commitment. For businesses with many leases, the new leasing standards can lead to significant administrative burdens and have a tremendous impact on both their financial statements and their debt covenants. Business owners need to understand the standards and get organized, sooner rather than later, to facilitate a smooth transition.
We’re here to help.
ARB can help you evaluate your leases, determine the associated assets and liabilities, and record your leases in compliance with the new standards. Contact David Jean or Gisele Couturier today if you have any questions or concerns about these new leasing standards.