Understanding the FASB Regulation Updates Impacting Your Leases & How to Get Prepared
To introduce uniformity in revenue recognition practices, the Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB) have issues new regulations on lease accounting. Below are few key changes that will affect how your property and equipment leases will be accounted for going forward.
1. Every “Off-Balance-Sheet” lease is moving to the balance sheet.
In an attempt to achieve more transparency and comparability in financial reporting, a company will now have to capitalize all leases and report them on the company balance sheet.
2. Different leases, different classifications, different impact on your financials.
Following GAAP, you now need to assess every lease to decide if it is more akin to a rental or a finance. Based on that determination, you will need to classify each as either an operating lease or a finance lease. Leases with terms greater than 12 months (which are most real estate leases) will need to be recorded as a right of use (ROU) asset because you are deriving a “benefit” from using something. However, your future stream of lease payments will be treated as a lease liability on the balance sheet.
3. The timing and intention of your leases must be accounted for and reflected correctly.
Now you have to recognize your new assets and liabilities using the present value of the lease payment discounted by the company’s borrowing rate, plus adjusted initial direct costs or improvements.
Many software suppliers haven’t really begun to address the changes that will be necessary to fully comply with FASB regulations. That’s because the nature of the update requires a deep and thorough analysis of critical components of lease administration software to mitigate the potential impact of the transparency in financial report that FASB was developed to address.
Blitzn began updating its technology early on, knowing that the adoption of these new rules would be imminent. We’ve rolled-out the new FASB-compatible update that includes new features that can provide you with the data you need to make the right decisions for your company.