Accounting for leases: A moving target

While leasing is an important tool, enabling companies to use property, plant, and equipment without making large initial cash outlays, the practical application of the sometimes form-driven, often complex, accounting literature is about to change.

Lessee motivations are as varied as the applicable accounting – and leases, particularly those governing real estate, often have a material impact on financial statements. Highly tailored arrangements such as leases of assets to be constructed or significantly improved, real estate sale-leasebacks, synthetic leases, master lease arrangements, and vendor financing arrangements present additional challenges.

And there’s significant change on the horizon as well. With critics charging that current lease accounting rules often do not portray the true economics of lease arrangements – and many constituents agreeing that greater transparency is needed in these kinds of off-balance-sheet obligations – the standard-setting boards are both issuing sweeping new standards for lease accounting.

The Financial Accounting Standards Board (FASB) and International Accounting Standards Board (IASB) are similar when it comes to how they will define a lease, how leased assets and liabilities will be recognized in the balance sheet, and how lease liabilities will be measured. However, differences between the Boards remain – the IASB is creating a model for lessees that treats all leases as financings in the income statement. In contrast, the FASB has proposed a dual model for income statement classification, similar to what we have today. Both the IASB and FASB will require lessors to classify their leases in a manner substantially similar to today.

The final FASB lease accounting standard, expected to be issued in February of this year, will be effective for calendar year-end public companies beginning after December 15, 2018. Early adoption is permitted. The IASB’s IFRS 16, was issued on January 13, 2016, with early adoption permitted but subject to certain conditions.

Navigating the complex, and changing, leasing guidance – and applying it to the specific facts and circumstances around your business – requires a deep understanding of the applicable standards and lease application processes. Getting it wrong could have an adverse impact on your business beyond just the financial statements; the effect on debt covenants or a proposed capital markets transaction can also be significant.

Watch this space for updated insights, resources and guidance as the new standards are finalized. Contact us to learn more about how we can help you ensure your financial reporting will be compliant with the leasing standard – and manage your lease business and process transformation in an efficient and measured way.