On February 26, 2016, the Financial Accounting Standards Board (FASB) released a new lease accounting standard that adds leases to the balance sheets of U.S. companies as “operating obligations” rather than debt. The new standard will go into effect for publicly traded companies on December 15, 2018, and for private companies on December 15, 2019.
The Equipment Leasing and Finance Association (ELFA) recommends that companies preparing for the changeover to the new lease account standard take these five steps to ensure a smooth transition:
1. Conduct an inventory of all equipment lease and rental contracts. In order to determine your company’s accounting needs under the new standard, you will need to have a complete understanding of your lease terms and contractual obligations.
2. Assess accounting technology needs. Begin discussions with your accounting software supplier about how they will support the new standard so you can determine your technology needs.
3. Review debt covenants. Discuss any potential implications on your debt covenants with your bank or creditors to see if the accounting changes will have any effect. The FASB has said that the long lead time for implementation of the rule makes it likely that these covenants would mature or be updated before it becomes an issue. The FASB also noted that technically, the leases will be considered operating obligations, not debt.
4. Seek professional help. Beyond obtaining accounting help, you should also consult with your equipment finance provider on best practices to assist you in determining the potential impact of the accounting changes on your leasing obligations.
5. Develop a plan. Use the information you’ve obtained to formulate a plan and identify the necessary resources for updating systems and technologies to support the new reporting rules.
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