The New Lease Accounting Standard: How it May Affect Your Business

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Initially introduced in 2016, the new lease accounting standard is now effective for all non-public entities for fiscal years beginning after December 15, 2021. Here’s what you need to know:  

What is the New Lease Accounting Standard? 

The new standard affects the reporting for operating leases of 12 or more months.  

An operating lease is an agreement to use and operate an asset without the transfer of ownership. Companies must now recognize a Right of Use “ROU” asset and a corresponding liability for those leases on their balance sheet. There is now a single lease expense which includes both interest and amortization. 

Why is this change taking place? 

The new standard aims to increase transparency and comparability of financial information. One main objective is to more closely align US Generally Accepted Accounting Principles (US GAAP) with the International Financial Reporting Standards (IFRS). There is the potential for a significant impact on an entity’s balance sheet, loan covenants and key financial ratios.  

Getting Started 

Now that we know what the standard is and why it’s important, here are some actions your business should take to get started. We recommend a three phase approach: 

• Plan 

  • Assess leases 

    • Review current leases and service agreements to ensure they are properly classified.

    • Evaluate the terms for new leases and upcoming lease renewals. 

    • Review existing third party agreement with banks, sureties, etc. that may have balance sheet related clauses 

    • Consider relief efforts such as accounting policy elections and other practical expedients. 

  • Identify lease population 

  • Create a roadmap 

    • Appoint a project leader and identify available resources 

    • Decide on the use of software as a solution 

• Assess the Impact 

  • Determine the impact adding leases onto the balance sheet will have on financial statements and key financial ratios. 

  • Record all required lease contracts in accordance with the new standard 

• Post implementation 

  • Ongoing compliance monitoring 

What’s next? 

If you have not started the initial planning for the new lease standard, you should act now. Public companies implemented the standard in January 2019 and experience has shown that identifying leases and embedded leases can be challenging and time-consuming. Now is the time to be gathering all of the requisite data to ensure your 2022 financial statements are compliant with the new standard.   

Questions 

Have questions about getting started or how this will impact your business? One of our accounting experts is ready to help.