After many years of debate and discussion about the merits or faults of off-balance accounting, coupled with a goal of more transparency in financial reporting, the new standard for lease accounting essentially requires all leases to be presented on the balance sheet. Entities used to expensing all lease payments for everything; including offices and warehouses to office and manufacturing equipment through operations under the historical operating lease accounting treatment will be significantly impacted by the new pronouncement.
The new standard effectively causes all leases to be treated similarly to what was formerly known as a “capital lease”, where property under lease is recorded as an asset and the related leasing obligation is recorded and accounted for in a manner similar to a mortgage. Under the new standard, capital leases will now be known as financing leases with similar accounting to that from days of old. The most dramatic shift is what were formerly leases expensed monthly as operating leases, will now also result in a capitalized asset and corresponding liability.
Beyond some wording changes in underlying definitions, there are a number of aspects to this standard that may make applying the new accounting, and presenting the new disclosures, a bit of a challenge. The first is to identify all leases; some of these will be easy by the title on top of the document. What may be difficult here, though, is identifying leases defined by the new standard that are embedded within other contracts for services. Secondly, there are a number variables that will need to be identified for each lease/class of leases, many of which are more difficult than they appear at first blush – including the term of the lease, what is included in required payments, and the underlying interest rate. What’s more, the classification of a lease as a financing lease or operating lease can be altered over time based on changes in circumstances, as can the overall accounting and disclosure when events such as a renewal or early termination occur.
The early indicators suggest a number of companies have not yet begun to prepare for implementing this new standard which is effective for annual and periods beginning after December 15, 2018 (and interim periods within that year) for public companies. What comes along with the implementation of this standard is the requirement to do a retrospective implementation (restatement) of all years presented on a comparative basis. For large public companies, that effectively means the 2017 calendar accounting will need to be restated in a couple of years. Private companies have the benefit of a one- year deferral for implementation.
Given the amount of data to be collected and analyses to be performed, there is no time like the present to reach out to your CPA for assistance.
Wayne R. Pinnell, CPA is the Managing Partner of Haskell & White, LLP. Serving as an Audit Partner, Wayne has worked with both publicly traded companies and privately held companies in a wide variety of industries including technology, manufacturing, wholesale/distribution, retail, real estate and specialized services. His expertise ranges from helping public companies meet their SEC reporting requirements to merger-and-acquisition transactions, as well as consulting with companies on general business operations including workflow, waste reduction, strategy, and growth/profit initiatives. Wayne can be reached at 949-450-6200 or wpinnell@hwcpa.com.