Here Are Your Articles for Tuesday, July 16, 2019
Is this email not displaying correctly?
View it in your browser .
Home Services Our Firm Specialties Contact Us
Share Save

New Leasing Standards Arrive for Private Companies

 

In 2016, the Financial Accounting Standards Board (FASB) effectively turned the lease accounting rules upside down. The new rules, which became effective on January 1, 2019, for public companies using a calendar year, are scheduled to be effective for private companies using a calendar year on January 1, 2020. The changes will significantly affect the financial statements of every company that leases property or equipment, especially those that rely on operating leases. 

Important Changes

All leases longer than 12 months in duration must be recorded on the company's balance sheet. That's a big change from the current rules, under which operating leases were recorded as a rent expense that didn't appear on the company's balance sheet. Under the new rules, with limited exceptions, all leased property or equipment is considered a right-of-use asset and must be recorded as such on the company's balance sheet.

Similarly, all lease payments are recorded as liabilities rather than operating expenses. This change affects other things as well. For example, interest expenses must be calculated as a cost of the lease and allocated over the term of the lease on a straight-line basis and determining the appropriate intereste rate to apply can directly impact both the ultimate financial statement presentation/classification of the lease and the amount of the right -of-use asset and lease liability that is recorded. Implementation of he new standards affect financial reporting across the board, including calculations for earnings before interest, taxes, depreciation and amortization as well as depreciation and certain tax calculations. The new rules also require additional quantitative and qualitative disclosures designed to enhance the transparency of a company's financial statements and to allow greater comparability between similar companies.

Note that lease arrangements are contracts that can be structured as part of a larger contract rather than as a separate lease agreement. For example, a master lease can contain different terms for each type of property or equipment in the lease.

In addition, month-to-month leases come under special scrutiny, particularly if the lease is between related parties. The tests include whether the lessee is —

  • Depreciating significant improvements to the property for more than 12 months
  • The sole user of assets and is paying the lessor to service the debt
  • Guaranteeing the lessor's debt
  • Able to relocate without incurring a great expense

Other Considerations

Other important considerations under the new rules include the following:

  • The definition of a reasonable useful life for the asset
  • Whether the asset has any useful life at the end of the lease
  • Who has title to the asset at the end of the lease
  • The cost of the asset to the lessor is at the end of the lease
  • The lease renewal options (e.g., what if the lease renews annually?)
  • What happens if there is no formal lease agreement?

The bottom line is that all businesses must take the time to review all their lease agreements, whether they are separate agreements, contained in a master lease or are part of another contract, and rework how their leased assets are accounted for and reported so they can be in compliance by January 1. The change involves the company's processes and procedures for recording leased assets.

Call us to avoid underestimating how long the process can take or how complicated it can be.

 
Share Save

Your Comments

Coulter & Justus, P.C.
Coulter & Justus, PC
(865) 637-4161
9717 Cogdill Rd, Suite 201
Knoxville, TN 37932
Friend Me on Facebook
Connect with me on LinkedIn
Saved Articles
Comments and Feedback
Refer A Friend
Your Privacy
Our firm provides the information in this e-newsletter for general guidance only, and does not constitute the provision of legal advice, tax advice, accounting services, investment advice, or professional consulting of any kind. The information provided herein should not be used as a substitute for consultation with professional tax, accounting, legal, or other competent advisers. Before making any decision or taking any action, you should consult a professional adviser who has been provided with all pertinent facts relevant to your particular situation. Tax articles in this e-newsletter are not intended to be used, and cannot be used by any taxpayer, for the purpose of avoiding accuracy-related penalties that may be imposed on the taxpayer. The information is provided "as is," with no assurance or guarantee of completeness, accuracy, or timeliness of the information, and without warranty of any kind, express or implied, including but not limited to warranties of performance, merchantability, and fitness for a particular purpose.
Powered by
Copyright © IndustryNewsletters All rights reserved.

This email was sent to: pbragg@cj-pc.com

Mailing address: 9717 Cogdill Rd, Suite 201, Knoxville, TN 37932