New Accounting Standards May Affect Whether or Not to Lease
September 4, 2016
The Financial Accounting Standards Board (FASB) has issued new Accounting Standards Update 2016-02 “Leases (Topic 842)”. The standard requires lessees to recognize lease assets and lease liabilities on the balance sheet and disclose key information about leasing arrangements. Previous lease accounting was criticized for failing to meet the needs of users of lessees’ financial statements. One prevalent complaint, in particular, was that the balance sheet did not reflect assets and liabilities arising from operating leases for lessees. So addressing this complaint was the primary purpose of this standard. Debated for years on how to accurately show lease obligations and rights to shareholders, the new rules don’t discriminate between small companies and large corporations. It was proposed to only show as a liability, which companies said would cause a financial hurricane. Through the recently decided new standard, companies reflect it also as an asset to balance, but it appears to be much more complicated than that. Bigger picture, the new rules will impact decisions on whether it is better for you to lease or to purchase, depending on your particular situation.
When the new rules go into effect, even though a lessee’s cash flow will remain the same, its financial statements will look very different. So it is important for a company’s stakeholders to understand the full impact of these new rules before they are put into practice. Current lessees should take an inventory of their leases and consult with a professional to identify how accounting for leases on the balance sheet might affect their specific financial situation, particularly the effect this might have on compliance with loan covenants. For lessors, other than relatively minor changes in accounting for the profit on certain leases, as well as updated terminology, the new standard does not change much in their day-to-day financial reporting of leases.
Bottom line is the changes aren’t as severe as first expected, but they will impact most companies accounting either neutrally or negatively. For more details to see if leasing or buying is your better choice under the new standards, please contact George McCutchen with Newmark Grubb Wilson Kibler. For more information on how the new standards will change your current accounting, please contact Matthew Hodges with Burkett Burkett Burkett Certified Public Accountants, P.A.
George McCutchen, CCIM, SIOR Matthew Hodges, CPA
Senior Associate | Principal Manager
P: 803.255.8603 P. (803) 794-3712
E: [email protected] E: [email protected]
About Wilson Kibler
Newmark Grubb Wilson Kibler is a full-service commercial real estate company with offices in Columbia, Charleston, Greenville, and Myrtle Beach, South Carolina. Our firm provides a broad range of commercial real estate services throughout the state, including tenant and buyer representation, project leasing, acquisition and disposition, property management, development and consultation. Our firm is an Accredited Management Organization and our professionals hold prestigious designations including CCIM, CPM and SIOR.
For further information visit www.wilsonkibler.com.
About Burkett Burkett Burkett Certified Public Accountants, P.A.
Burkett Burkett & Burkett exists to help our clients achieve their personal and business goals. We serve individuals and businesses of all types and sizes through innovative thinking, technologically-advanced processes, and friendly service. Our practice has a strong foundation in tax, auditing, financial accounting and consulting. We provide services in critical business performance areas, such as estate and trust administration, litigation support, valuation, cost segregation, internal controls, audit, and tax.
For further information visit www.burkettcpas.com
