New accounting rules for leases goes into effect soon
The Financial Accounting Standards Board (FASB) sets the accounting rules for the United States. A big change will be occurring that will affect almost all companies and not for profit organizations very soon. Historically, many leases were recorded as “operating leases” and the lease payments were expensed monthly and the lease terms were discussed in the footnotes to the financial statements. Under the new rules, for leases of more than 12 months in length, an asset and liability will be recorded on the balance sheet. These rules may be applied now but must be followed on the first financial statements you issue for December 31, 2020 yearends and later periods.
There are several key reasons this change is happening. The international accounting standards follow a similar process to recognize “true financial obligations” as liabilities and reflect more of the assets an organization is using. The chair of the International Accounting Standards Board spoke at a meeting I attended several years ago and he said “For once, I’d like to fly on a plane that’s on somebody’s balance sheet.”
These changes, however, will impact financial metrics, bank debt covenants and perhaps incentive compensation arrangements. These are effective for all financial statements prepared in accordance with Generally Accepted Accounting Principles (GAAP), including audits, reviews, compilations and company generated financial statements.
2014 was the year of the Ebola outbreak and when Robin Williams died. That doesn’t seem that long ago, so 2020 will be here before we know it. Please let us know if you have questions or want to discuss further how these accounting changes will affect your financial statements.