By Matt Medlin, CPA, CFE, CFF
April 21, 2020 update: To provide accounting relief and clarity during the COVID-19 crisis, the FASB published an exposure draft with proposals to delay the effective dates for Leases (Topic 842). Find more information here.
The FASB has issued its much anticipated new rules on accounting for leases.
This will cause virtually all leases and rental agreements lasting more than a year to be shown as liabilities on the balance sheet, with an offsetting asset representing the right to use the asset.
So every office lease, server lease, and other equipment financing agreement will need analysis. The liability will be calculated based on the discounted lease payments over the lease term.
While the new rules don’t go into effect until 2019 for public companies or 2020 for private companies, they should be considered now when companies are negotiating lending agreements or other arrangements that will have covenants tied to debt to equity ratios.
- the determination of the lease term requires analysis of options to renew
- the determination of lease payments needs to consider tenant improvement allowances, rent escalation, rent holiday and purchase options
It is not an intuitive statement and this change will require every company with leases to give it some thought. Kick it around with your CPA soon and work out a game plan.