In early 2016, the Financial Accounting Standards Board (FASB) issued new guidance on accounting for leases. This guidance will have a significant impact on companies’ financial statements, as well as on the lenders, licensing bodies, and other third parties relying upon financial statement data.
The most sweeping change will be to leases currently classified as operating leases. Under the present guidance, these leases are not being recorded on the balance sheet; they are reported as rent expense on the income statement. Under the new guidance, operating leases will be capitalized on the balance sheet.
With many companies now using operating leases as a means of “off-balance sheet” financing, the new guidance will recast current financial measures such as working capital, EBITDA and debt service coverage ratio.
It is imperative that companies and the users of their financial statements begin now to discuss the implications of the new guidance and the residual effects it will have on their business operations when it is implemented.
The new guidance will be effective for fiscal years beginning after Dec. 15, 2019 (calendar year 2020) for private companies. If a company presents its financial statements on a comparative basis, they will need to begin applying the new guidance a year earlier.
Please contact your KraftCPAs advisor if you have questions about implementation or how this new guidance will impact your business. If you are required by a third-party to have audited or reviewed financial statements, members of our assurance services team would be happy to meet with you and your banker or other user of your financial statements to explain the upcoming changes.