New lease accounting standards released

The long-awaited new lease accounting standards have been issued by the U.S. Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB). Although the two boards had hoped to converge on one standard, two separate standards have been released to guide companies based on whether they follow U.S. Generally Accepted Accounting Practices (GAAP) or International Financial Reporting Standards (IFRS).
The changes were made to provide more transparency and information for decision-making to investors and other users of financial reports. The new rules also respond to a Securities and Exchange Commission (SEC) directive to bring corporate assets and liabilities onto the balance sheet. 
All types of leases are affected, including real estate, computer technology and large capital equipment leases. Those companies most affected by the changes are retailers with store leases, banks with branch offices, and transportation companies with equipment leases for planes, trucks, trains and ships.
“Although lessees will have more accounting work to do, we do not see this as a major change for companies in terms of obtaining financing,” says Anthony Cracchiolo, president and chief executive officer of  U.S. Bank Equipment Finance and a board member and chairman elect of the Equipment Leasing and Finance Association (ELFA). “From a lender’s point of view, we already factor in information contained in the footnotes and off-balance sheet items when doing financial analyses.” 
The new FASB Standard will go into effect for U.S. public companies after December 15, 2018, and for private companies after December 15, 2019. The transition period will help companies take the necessary steps  to review all leases and capture data, test accounting systems and  ensure accurate reporting. 
“Operating lease obligations have been disclosed in the footnotes to the financial statements and have  not impacted the balance sheet,” says William Bosco, technical consultant to ELFA on the lease accounting standard changes. “Going forward, all leases will  appear on the balance sheet as assets and liabilities, although they will be considered non-debt liabilities. There will be no impact on the  rent expense reported on the  income statement.” 
FASB versus IASB standards FASB will allow for two kinds of  leases: finance leases and operating  leases, and the rules for classification of these types remain essentially unchanged under U.S. GAAP. A finance lease (previously called a capital lease) will report front-loaded costs on the profit and loss (P&L) statement comprised of amortization of the asset and imputed interest costs. An operating lease will report level rent expense on the P&L.
In contrast, IFRS 16 (the new IFRS standard for leases) will treat all leases the same and operating lease liabilities will be considered debt. For U.S. subsidiaries of foreign companies using IFRS, the new standard will be effective in January 2019. IFRS companies will feel the largest financial impact from the change in lease accounting standards.
Ralph Petta, president and CEO of ELFA, notes: “Most companies under FASB will not see a significant negative impact from this change,  
as most financial ratios and measures will remain unchanged, other than return on assets.  The new FASB standard should have little or no impact on most companies’ debt ratios, debt covenants and credit ratings.”
Adds Cracchiolo from U.S. Bank: “Financial accounting is only  one aspect of the overall  decision-making process of whether to lease or buy equipment. Those decisions are based on many  factors, including capital needs,  cash flow savings, tax benefits, service, asset management, disposition and risk management. Companies will retain the flexibility  to decide what best aligns with  their business strategies under  the new rules.” 
Plan for a smooth transition To prepare effectively for the new lease accounting standards, ELFA suggests that companies inventory their leases and start a transition plan now that includes these steps: • Budget for the resources needed to execute your transition plan and the new process to account for leases under the new rules. • Review all existing real estate leases, equipment leases and rental contracts to fully understand terms and contractual obligations and extract the financial data needed to capitalize the lease and track for possible future changes. • Determine the best way to handle accounting and tracking of lease information.
• Discuss with your accounting software provider any new  requirements or enhancements needed to help you meet the  new standard. • Review debt covenants and  discuss any potential implications with your bank or creditors. • Seek out industry expertise and counsel from your accountant, bank and/or equipment finance provider to help you assess the impact of lease accounting changes on your current and  future leasing needs.
The ELFA website has a special section on the new lease accounting standards with helpful FAQs, background documents, a web seminar and training information to help educate stakeholders: elfaonline.org/issues/accounting/ 

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