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FASB Issues Final Guidance on Lease Accounting


Today the Financial Accounting Standards Board (FASB) has issued the final guidance on lease accounting. The accounting standards update (ASU) has been over seven years in the making, with multiple exposure drafts and comment periods delaying and modifying the original guidance as a multitude of industry professionals weighed in on impacts to balance sheets and financial statement ratios. In the end, the standard setters have mostly stuck to their guns: All companies, both public and private, will be recognizing operating leases with lease terms of at least one year as lease assets and corresponding lease liabilities on the balance sheet. Accounting for capital leases is not substantially changed by the new standard.
The ASU is intended to improve the accuracy and usefulness of balance sheets and income statements for financial statement users, and accomplishes this by taking off-balance sheet liabilities out of the footnotes. An unintended consequence of the standard is sure to be a change in key financial statement ratios for many companies. If your company has banking covenants that require minimum debt to equity or debt service coverage ratios, now is the time to estimate your lease assets and liabilities and that impact to ratios subject to covenants. If your covenants would be in violation if the standard was effective today, now is the time to talk with your financial statement users to address the changes head-on before the effective date.
For private companies the standard is effective for fiscal years beginning after December 15, 2019. For most companies this means you must apply the standard for your financial statements ending on December 31, 2020.
For more information on FASB’s final guidance on lease accounting, click here.

     

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