Companies Getting Ready for FASB's Leasing Standard

Published on March 29, 2016

The Financial Accounting Standards Board is expected to release its long-awaited lease accounting standard this quarter, and companies are bracing for the impact on their balance sheets. 

The changes will require companies to gather significantly more information and require more management judgments each reporting period, according to PricewaterhouseCoopers. The changing model might affect financial ratios and metrics, “lease vs. buy” decisions, accounting processes and controls, along with technology. 

For those companies with mostly finance leases, there won’t be as much of an impact because those leases are already on the balance sheet. According to FASB, finance leases will be accounted for in substantially the same way as capital leases are under current GAAP. 

The new standard will mainly affect companies where the leases have been kept off the balance sheet until now. It should not have much of an impact on corporate profits, though, or greatly surprise many investors and financial analysts. However, analysts are going to learn more about the lease terms. Companies will also need to provide more disclosure about embedded leases now. 

Trade groups like the Equipment Leasing and Finance Association have been sounding warnings about the impact of the new standard on equipment-leasing companies. Lessees may elect to work with their lessors to modify the terms of their leases to lower the impact on their financial statements. 

There are also differences between the upcoming FASB standard and the version released last month by the International Accounting Standards Board for companies using International Financial Reporting Standards Those might have some impact on multinational companies. 

Companies will need to start preparing for implementing the new standard over the next few years and some will need to produce comparative financial statements as they make the transition. The effective date of the standard is 2019, so it is at least three years out, but for public companies that have comparatives you’re looking at 2017, 2018 and 2019. 

Companies will need to spend time accumulating the data and perhaps consider implementing a new system to handle both the new leasing and revenue recognition standards. 

A staggered implementation probably makes sense for many companies. Both U.S. GAAP and IFRS, FASB and the IASB have allowed companies to adopt the standards early. 

Companies may decide to change their procurement processes when entering into leases under the new standard. Companies can reduce the potential compliance costs with the help of technology.