New Lease Standards Bring Significant Challenges for Businesses

The Financial Accounting Standards Board (FASB) has issued new leasing standards for businesses, moving 12 month or longer leases from the footnotes of the financial statements to the balance sheet. This means that a company will now need to list their leases as both assets and liabilities.

While this new lease standard is still a bit away from implementation – effective for fiscal years beginning after December 15, 2018 for public companies, and fiscal years beginning after December 15, 2019 for private companies – it is expected to be a daunting task that businesses need to start to prepare for.

A Deloitte survey of businesses conducted late last year illuminated issues companies face with implementing the new standard, as the majority were either “somewhat prepared” or “not too prepared”. Here were two significant challenges that were found:

  1. Collecting all of the necessary data on all organizational leases in a centralized, electronic inventory. This difficulty applies mainly to companies that possess a large volume of leases and typically use programs like Microsoft Excel to collect data. This kind of software does not have the capacity to accurately and efficiently implement the new standard.
  2. Determining how to start the process of implementation. Obtaining a company-wide handle on all leases has proven to be problematic; however, that is essentially where the starting line is. Companies must ensure their lease records are accurate and they have properly accounted for all office and machinery equipment and office space leases.

The new revenue recognition standard that goes into effect the year before the new lease standard will not make implementation any easier. It is even more imperative to begin the process to ensure successful transitions for companies.

It is also essential to remember that while proper implementation is vital, the financial impact on every company must also be evaluated. These are questions that should be considered before the new lease standard goes into effect to avoid any headaches down the road:

  • How will this new lease standard impact your financial statements?
  • Will the new lease standard impact your loan covenants?
  • How will the new lease standard impact your lease vs. buy strategies?

The industry experts at Sax are well versed in the new and upcoming lease standards. For more information on these new standards, please contact Adam Holzberg, CPA, MBA at aholzberg@saxllp.com.