Although the lease standards have been delayed multiple times, the new effective date is coming up quick. Nonpublic entities should apply the new standard for fiscal years beginning after December 15, 2021, and interim periods within fiscal years beginning after December 15, 2022. Early application is permitted for all entities.
Main changes from prior lease standard:
- Nearly every lease will be recognized on the balance sheet. Specifically, lessees will report a lease obligation and a corresponding asset for both operating and capital leases.
- The term “capital lease” will change to “financing lease” going forward.
- Communicate with your bank(s) regarding loan covenants; as most leases will now be reported as assets and liability on the balance sheet, companies should discuss with their banks if the additional liabilities will impact their loan covenants.
- Communicate with your tax accountants regarding state apportionment; as most leases will now be reported as an asset and liability on the balance sheet, companies should discuss with their tax accountants if the additional assets will impact apportionment and require other tax filings.
- Review of current leases; go through your current leases to determine if each will be considered financing or operating leases under the new standard. Practical expedients are available for nonpublic entities to make this transition easier.
- Review of other vendor contracts; go through your vendor payments and agreements to determine if there are additional leases that have not been recorded previously as such.
- Consider lease software; the software will make implementation smoother for companies and assist with tracking leases going forward. Many of the software choices have availability to store your leases in PDF, create journal entries both for implementation and each month going forward, and generate amortization tables. Many of the options are also budget-friendly.
Lessees have two options for implementation of the standard, including the modified retrospective approach. This approach would have the company implement retrospectively at the beginning of the adoption period through a cumulative-effect adjustment made to equity.
How Can We Help?:
CDH is here for you every step of the way to help discuss potential issues with your banks or accountants, help you review your current and future leases and other vendor contracts, as well as assist with finding a lease software that fits your needs.
Contact Emily Bartlett, Senior Assurance Manager and internal lease expert, at [email protected] with questions regarding the new lease standards.