On February 25, 2016, Financial Accounting Standards Board (FASB) issued the long-awaited lease accounting update. The core principal of the new standard is the idea that a lessee shall initially recognize a right-of-use asset (ROU) and a liability for its lease obligation as of the lease commencement date for virtually all of their leases. The effective date is not until 2019 for public companies and 2020 for all other types of organizations. Still, many people are already asking, “What should I be doing now?”
There are certain steps you can begin taking now to help alleviate some of the stress these changes are bound to cause.
Steps Your Organization Can Take to Prepare for FASB's Lease Accounting Standard
Understand the FASB lease update – With the release of this anticipated update, there are many trainings, webinars, and materials available to help explain the specifics of the update and what the impact will be. Take advantage of these resources now to ensure that you understand how the update will impact your organization.
Inventory your leases – The largest struggle for most organizations will be that there is generally a lack of centralization for lease maintenance within the organization. It will be vital that organizations be able to identify all equipment and rental contracts to assess whether or not each lease meets the definition of a lease that is to be capitalized. Pay close attention to the termination dates of the lease contracts. For those leases that extend past the effective date of the update or are expected to be extended past this date, organizations should begin summarizing the key terms of the agreements now.
Establish software/tracking assistance – Many organizations currently do not have a good system for tracking and managing leases. Your organization should assess whether tracking software would be beneficial. For those with a significant amount of leases, this could help reduce some of the added administrative work that will be involved with tracking these lease agreements.
Educate stakeholders of your organization – With this change, there could be potential effects to items such as debt covenants, bonus calculations, and other metrics used by stakeholders of your organization. It is important to inform all stakeholders about these changes, and to discuss how you should adjust or amend any related agreements.
Have a plan in place – Although it may seem far away, it is important to put a plan in place now to ensure that you are ready when the time comes. Without a formal plan in place, organizations may find themselves struggling to be in compliance by the effective date.
With these changes, there will be added administrative work; however, there will also be opportunities to improve your organization. In the process of inventorying and centralizing your leases, you will gain visibility into your full leasing portfolio. In turn, this can lead to better decisions around your leasing strategies, and potentially help in making decisions on leases and purchase options. So, while the effective date may seem far away, do not make the mistake of waiting until it’s too late to begin taking these steps.
Schneider Downs has released a detailed whitepaper in response to the high level of inquiries we have received from clients and friends regarding the FASB's new guidance on lease accounting.
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Material discussed is meant for informational purposes only, and it is not to be construed as investment, tax, or legal advice. Please note that individual situations can vary. Therefore, this information should be relied upon when coordinated with individual professional advice.