After about a decade of negotiation and work, the Financial Accounting Standards Board has recently issued their new set of lease accounting standards. While their original goal of creating a single global standard never got achieved since the IASB is also releasing a different new set of rules (IFRS 16 Leases), GAAP is changing to more closely track the methodology used in other parts of the world.
When is this happening?
Back in 2014, the IASB and FASB gave up on creating their unified standard. Once they did that, work progressed relatively quickly. In November of 2015, the FASB voted to release the standard and the new standard was released on February 25, 2016.
Public companies will have to change their accounting statements to reflect the new standard starting in any fiscal year that starts after December 15, 2018. Private companies get an additional one year. If you want to get started sooner, though, GAAP allows you to implement these new lease accounting standards early. Since you may need to do some retroactive reporting (public companies may need to report for years as early as 2017 to allow for year-over-year comparisons for 2017, 2018 and 2019), making an earlier transition might be appropriate.
What is the change?
The details of the changes to the GAAP lease accounting standards are diverse, highly technical and best explained and implemented by your company's in-house or outside accountants. However, the fundamental shift is that the vast majority of your company's leases will have to be reported as obligations on your balance sheet. While some very short-term leases will not have to be, it's a good rule of thumb to assume that every real estate lease will get reported as an asset and liability.
How much is this going to cost me?
These lease accounting standards shouldn't affect your company's profit. The current rent payments that you are making will get split into an allocation for depreciation and into an allocation for interest. This means that there shouldn't be any impact on your net profit or on your net cash flow.
The costs come up in compliance. To meet the new standard, you will have to carefully catalog all of your leases, determine which ones can be left off of the balance sheet, and develop a system for splitting the payments and reporting them. Along the way, you will have to replace much of your current reporting methods. If your company has a large number of leases and does not have the right procedures or software to comply with the new lease accounting standards, this could be a significant expense.
What does this really affect?
The real impacts of the changes to the GAAP lease accounting standards generally aren't in actual dollars and cents. They're in how you report your company's performance. Your balance sheet ratios will change, since you will have more going on your balance sheet.
You could see a benefit from the new standard, as well. Since they change lease payments from a single operating expense into a combination of operating expenses and depreciation-like expenditures, a portion of your occupancy costs could end up being excluded from your EBITDA. Lower expenses means a higher EBITDA and could potentially improve your enterprise value.
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The new lease accounting standards are coming. That you can be sure of. While they change how your company reports your leases, they don't change the fundamentals of your business or of the spaces that it occupies.
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