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What You Should Know About the New Lease Accounting Standards

Each area of accounting is subject to strict regulations and reporting guidelines, and leasing transactions are no exception to this rule. The Financial Accounting Standards Board (FASB) oversees standards related to leasing transactions, and in early 2016, the board released a new set of guidelines, which will take effect in December 2018. These guidelines will likely impact your work as an accounting professional, so understanding them now as you pursue your master’s degree in accounting is an important preparatory step.

An accountant studies new standards.

Learn about the most significant changes in these new lease accounting standards and discover how businesses can prepare for some of the challenges that lie ahead.

End to Off-Balance-Sheet Accounting

In this Accounting Standards Update (ASU), the most substantial change involves an important update to financial reporting guidelines. Currently, entities may legally track many of their leases off of their balance sheets. As the FASB reports, organizations such as the U.S. Securities and Exchange Commission (SEC) have long criticized this practice, as it may provide an incomplete depiction of an entity’s financial outlook.

When the ASU takes effect in late 2018, this practice of off-balance-sheet accounting will largely come to an end, as accountants and auditors must incorporate leases into balance sheets. According to AccountingWeb, these new standards could have a substantial impact on companies whose business models revolve around leasing property. For example, public businesses, such as fast food chains and telecommunications companies, that lease real estate and manufacturing equipment, could begin producing drastically different balance sheets.

Revised Lease Definitions

Another significant change reflected in this ASU involves defining leases. Those who have a master’s in accounting and some experience in the field may have already become familiar with current lease definitions. Existing standards divide leases into two categories, capital and operating. As the FASB explains, lessees must include assets and liabilities related to capital leases on their balance sheets, but lessees may track assets and liabilities related to operating leases off the balance sheet.

Once this ASU takes effect, companies must include virtually every type of lease on their balance sheets. Leases that span less than 12 months will be exempt under the new guidelines, as are arrangements that do not meet the traditional definition of a lease. As GAAP Dynamics explains, an arrangement may operate similar to a lease yet it may not meet the revised definition if the lessee does not gain the right to control the asset in question. In this case, the lease may appear off the balance sheet.

Greater Transparency Around the Globe

The FASB’s updates to lease accounting standards directly apply to entities based in the U.S., in practice, but their reach extends much further. This is due to the FASB’s close partnership with the International Accounting Standards Board (IASB). For more than a decade, the two boards have worked closely to analyze and improve global accounting standards. As a result, the IASB announced a similar ASU that will take effect in January 2019.

Under current lease accounting standards, companies with global operations and assets must remain aware of the various international guidelines and adjust their terms accordingly. When the new standards from the FASB and the IASB take effect in late 2018 and early 2019, international businesses are likely to benefit from increased transparency and clearer financial disclosures. These improvements are likely to help businesses make decisions that are better informed and more financially savvy. According to the FASB, these new standards will enable investors to better grasp the amount and timing of cash flows that stem from lease arrangements.

Improved Training and Workflow

While many global organizations have encouraged the development of these new lease accounting standards, there is no question that both accounting firms and their clients will likely encounter numerous challenges during initial implementation. Though the ASU does not begin until late 2018, the FASB has allowed companies to adopt the new standards early. For many businesses, implementing these new standards early may be a smart decision, as doing so enables them to rethink their leasing options and reformulate operational strategies as necessary.

According to Chartered Global Management Accountant Magazine, not many companies have chosen early adoption. Under 5 percent of public companies are early adopters, while 6.7 percent of private businesses have adopted the new standards early. In fact, many companies are likely to need substantial training and workflow adjustments before they are prepared to implement the 2018 ASU. A recent poll by accounting firm Deloitte indicates that 33.8 percent of accountants are prepared for the new standards, while 28 percent still require substantial preparation.

To implement these changes on the mandated timeline, both companies and accounting firms should consider adjusting their processes as early as possible. In Chartered Global Management Accountant Magazine, Deloitte representative and CPA Sean Torr recommends that steering committees and project management teams begin to oversee progress as soon as possible and that companies implement internal controls to make sure that they track all leases properly.

Increased Need for Technology

Though the upcoming ASU will certainly require companies to alter their lease accounting workflows and financial report management, many accounting professionals anticipate that technology will present the biggest challenge. Smaller companies may have the capacity to make quick changes to their balance sheets, but large companies and those that do substantial business around the world will need to make large-scale adjustments to the types of data they collect and the methods they use to report it.

As AccountingWeb reports, software options already exist for use by both accounting firms and individual companies. Identifying the most appropriate application and implementing it may require some overhead, though. Companies with international offices and a range of technology options will likely need to streamline applications and workflows in order to collect and aggregate data across the company. Many businesses will also need to use technology to compare new balance sheets and financial statements against earlier methods. All companies will likely find themselves exploring data storage methods to keep this new information safe and secure.

Many businesses are likely to encounter challenges and missteps as these new lease accounting standards take effect. As you consider your future in accounting, imagine how an advanced degree can help you confront these challenges. If you choose to enroll in Maryville University’s Online Master of Science in Accounting program, you may have the opportunity to develop the skills and hone the expertise essential for providing specialized advice.

Sources:

http://www.accountingweb.com/aa/standards/the-wait-is-over-fasb-issues-new-guidance-on-lease-accounting

http://www.accountingweb.com/aa/standards/companies-slow-to-transition-to-new-lease-accounting-rules-survey-finds

https://www.pwc.com/us/en/cfodirect/issues/lease-accounting.html

http://www.fasb.org/jsp/FASB/FASBContent_C/NewsPage&cid=1176167901466

http://www.fasb.org/jsp/FASB/Page/BridgePage&cid=1351027207574

http://www.gaapdynamics.com/insights/blog/2016/08/16/top-5-biggest-changes-with-the-new-lease-accounting-standard-(asc-842)/

https://www2.deloitte.com/us/en/pages/risk/articles/new-lease-accounting-standard.html

http://www.cgma.org/magazine/2017/jan/implement-new-lease-accounting-standard-201715811.html