The new lease accounting standard is coming, and non-public organizations will need to prepare to comply for fiscal years beginning after December 15, 2021.
What is the New Lease Standard?
The new lease standard is intended to account for all lease obligations on financial statements, rather than excluding operating leases as they were under the old standard. This change ensures that a company’s financial situation is reflected as accurately as possible within the financial statements.
With the new lease standard, all leases must appear on the balance sheet as a Right of Use Asset and Lease Liability.
What Qualifies as a Lease?
To qualify as a lease under the new standard:
- It must be a physical asset
- You must have the right to control or use the asset
- The asset must be explicitly or implicitly identified
Examples include, but are not exclusive to:
- Office rental
- Photocopiers
- Computers and servers
- Vehicles and equipment
What does not qualify as a lease?
Examples of what is typically not considered a lease:
- Software subscriptions
- Leases for intangible assets
- Leases for exploration or use of non-renewable resources
- Leases of inventory or assets under construction
Some judgment will be necessary for analyzing existing leases and implementing the new standard. The good news of a judgment-based standard is that the facts behind your contracts drive the numbers on your financial statements, rather than implementing hardline accounting rules that may not apply to every circumstance
Keep in mind that this analysis and interpretation increase the time it will take to implement the new standard — which is why you should act now.
What is the impact of the new lease standard?
As you’d expect, implementing the new lease standard means you will change how you think about and account for individual leases. There are a few additional considerations to keep in mind as well.
Debt Covenants
Changing accounting methods doesn’t change your organization, but it can affect the way your financial results are viewed by outside parties. In particular, adding significant lease liabilities can impact your compliance with debt covenants. It’s critical that you get a handle on the potential impact and start conversations with your bank as early as possible.
Policy Elections
The new lease standard requires organizations to make policy decisions about how they will handle leases. Many of these policies make implementation easier, but often will result in a larger asset and liability on the books. Early on, your organization needs to review and decide on the policies that are right for you.
Process and Controls
In most organizations, operating lease decisions are fairly decentralized, especially when multiple locations are involved. The new lease standard requires these decisions to be documented and available for accounting, which introduces a need for new systems, processes and controls. The good news is that organizations are often finding efficiencies and cost savings with this new approach.
Next Steps: Taking Action
With the time and work required to implement the new lease standard, we strongly recommend you take action as soon as feasible. It’s important to assess:
- The size and complexity of your lease portfolio
- The strength and current centralization of your processes for leases
- The policy elections that you will select for the new lease standard
- The scope of your implementation process
Check out our new lease accounting standard checklist and quick reference guide to get started with the implementation process.
You can also learn more about the benefits of our partnership with LeaseCrunch and how the software can easily walk you through the new lease standard.
Anders advisors are ready to help and provide the resources necessary as you implement the standard within your organization. Contact an Anders advisor below to learn more and get started.
