If you are making new trucks and trailers purchases, consider Financial Accounting Standards Board’s (FASB) Accounting Standards Update (ASU) No. 2016-02, Lease (Topic 842) when entering into these new finance or operating leases. This new ASU now requires the lessee to recognize a right-of-use asset and lease liability for contracts that meet the definition of a lease. Previously, operating leases were not required to record the assets and liabilities. Operating leases were previously only disclosed in the footnotes to the financial statements; however with the adoption of the new standard, operating leases must be disclosed on the balance sheet as well as in the footnotes. The FASB stated during a July 2017 update that “the lease standard is meant to address a long-standing flaw in U.S. GAAP that has permitted businesses and other organizations to leave a large part of their liabilities off their balance sheets by structuring them as leases instead of purchases funded through borrowed money.” Companies with significant lease portfolios will see their assets and liabilities on their balance sheets soar as the transition begins to recognize the additional operating leases. There is not expected to be a significant, if any, impact to the income statements of such companies.
Within the last year and half since the lease ASU was issued, companies are realizing the new accounting is broader than under the previous standards and taking an inventory of all day-to-day leases can be time consuming. For transportation and logistics companies entering into leases for fleets, warehouses and equipment is the normal business practice. For most companies, engaging in new leases is a routine process; however, most companies do not have a centralized process for lease maintenance. Whether entering into new leases or making regular lease payments, it is important for companies to take an inventory of all leases and access whether the contracts meet the definition of a lease under the new standard. Implementation of the lease standard is not required until 2019 for public companies and 2020 for all other entities, but start early and begin an inventory of your leases today.
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.
Another hurdle companies are facing after identifying all leases is developing an IT solution for tracking and managing their leases. Companies with a large inventory of leases should evaluate whether a tracking software would be a good investment for them to reduce some of the added administrative tasks and possibility of errors. Schneider Downs Technology Advisors has developed a web-based software solution, simpLEASE AccountingSM, to provide some insights on the transition. This software will help companies in the determination of operating versus finance (old capital) leases, as well as determining the present value and the accounting entries required for recording these leases.
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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.
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