FASB Lease Accounting
The new FASB and IASB Lease Accounting Standards are finally here and the clock is ticking.
An estimated $2 trillion of lease liabilities are about to hit your balance sheet.
Where do you start?
FASB will be releasing more details on the implementation of the new standards but your organization needs to start preparing now. Here are some areas to get a jump start on today:
- Collect a complete list of your real estate and equipment leases
- Form a cross-functional FASB team from Real Estate, Finance, IT and potentially others to look at your existing processes and decide on changes
- Evaluate your current portfolio to see how it will be impacted by the new financial reporting requirements
- Consider renegotiating your lease portfolio as items such as service charges and renewal options may significantly impact your balance sheets, shareholder equity and net income
- Create a FASB compliance plan with particular attention paid to how FASB will impact your financial reporting
- If you don’t have a FASB ready Lease & Contract Management solution get the ball rolling today by contacting us. Having a single source of the truth for this information is imperative to FASB success
After decades of review, on February 2016, FASB issued an Accounting Standards Update (ASU). The update intends to improve financial reporting about lease liabilities. Retail, Hoteliers, and Airlines are expected to be one the most affected industries. Tenants with multiple locations could see billions of dollars of debt added to balance sheets.
Average company to see 22% increase in Interest-Bearing debt
A few core changes have been made:
- Lease Assets with terms longer than 12 months will be recognized on the balance sheet.
- New Type A & Type B lease types to classify financing or straight line accounting approaches.
- ASU requires disclosures to help investors and others understand cash flows due to these leases.
Why were these changes made?
FASB fulfilled a number of goals for transparency, with these new lease accounting standards.
- Improved representation of lessee's rights and obligations due to leases
- Fewer opportunities to structure lease transactions, with the intent for a particular outcome on the balance sheet
- Improved understanding and comparability of lessee's financial statements
- Aligns accounting and transactions guidance more closely with revenue guidance in the 2014 revenue recognition standard
- Financial statement users receive more information about lessors’ leasing activities and exposure to credit & asset risk, as a result of leasing.
- Clarified Definition of a lease: A contract, or part of a contract, that conveys the right to control the use of identified property, plant, or equipment (an identified asset) for a period of time in exchange for consideration.
45% of Finance Execs don’t think or don’t know if they’re well prepared to adapt to the proposed change
What does this mean?
Companies with large real estate portfolios will be largely impacted. CFO’s will need to be sure that lease assets are managed correctly, and that processes are changed accordingly.
A variety of challenges will be encountered. In a recent study, 80% of executives felt that it would be difficult to comply with the new FASB guidelines. Many accounting firms suggest that you shift towards the new guidelines begin in 2016.
Are you ready?
Lucernex™ has our customers covered. We have been keeping a close eye on the evolution of the new standards for the past 10 years and have made sure that our Lease Management and Lease Accounting solutions are FASB and IASB ready.
We know how important this issue is to our customers so we focused on making sure they are ready when their CFO starts asking questions.
Want to learn more? We're ready to answer your questions.