How to Prepare for the New Lease Accounting Standards

Lease accounting standardsNew lease accounting standards will go into effect for public companies for years beginning after December 15, 2018 (2019 year-end) and for private companies for years beginning after December 15, 2019 (2020 year-end). Those affected by the changes should be aware of the details and begin planning for implementation now. Planning will include heavy training for accounting departments as well as vendors and customers.

New Lease Accounting Rules

The Financial Accounting Standards Board has issued new rules to improve the financial reporting of leasing transactions. New requirements dictate that companies leasing facilities and equipment to others recognize the assets and liabilities of leases. Balance sheets must record the transaction details. Prior to this implementation, capital leases were the only type to require such documentation.

Establish a Committee

To guide the transition process, affected companies should establish committees to attend training events and become knowledgeable about the new standards. The group should be comprised of both accounting personnel and cross-functional project managers. The committee can then work to implement the process in a way that will work for the organization.

Educate Dealers, Vendors, and Customers

The Equipment Leasing and Finance Association has created a helpful white paper outlining the new method’s changes and benefits. Stakeholders should engage in conversations directly with the companies and receive this reading material for reference.

Corporate Accounting Teams

There are three factors for companies to consider, in addition to those listed above:

1. Accounting teams will need to identify all leases, preparing a current and accurate inventory. Once complete, the accounting team will be able to determine which leases the new mandate affects. It is also important to break out leases that are less than a year (and not reasonably certain that they will be renewed) as they may not be required to be capitalized as a right of use asset.

2. Accounting departments will need to examine how the new rules will change financial reporting and transactions, specifically for the company. In addition to examining basic paperwork changes, teams will also need to determine possible ripple effects, including those on taxation and business processes. It is important to accurately record the leases by breaking out the lease and non-lease components.

3. Accounting teams will need to determine whether current accounting systems can adequately handle the required changes. If accounting software or systems cannot handle the change, the team will need to work toward a solution. To assess the current systems, determine how easy it will be to create the proper accounting procedures. Not all software is designed to handle the change to the leasing standards. There is software that purports the use of algorithms to extract lease components from contracts to help with the efficient review of the contracts for lease components.

Making the Transition Smooth

The key to making the transition smooth for everyone is to plan early. Ensure everyone is onboard and educated before changes take place. With cross-functional collaboration, employees will be able to identify potential challenges and opportunities. Begin planning now to ensure a smooth process by meeting with your lessors to discuss the impact of the new leasing standards.

Whether you have a small business or a huge conglomerate, contact Gilmore Jasion Mahler to find out how we can help you prepare for the new lease accounting standards.

Michael Brough Gilmore Jasion MahlerGilmore Jasion Mahler Partner Michael Brough contributed this blog. Mike is a partner in the Gilmore Jasion Mahler assurance department with over 13 years of public accounting experience. Mike is a member of GJM's Manufacturing Specialist Group and works with clients in many other industries as well, including government and nonprofit.

Established in 1996, Gilmore Jasion Mahler, LTD (GJM) is the largest public accounting firm in Northwest Ohio, with offices in Maumee and Findlay. Locally owned, GJM offers cloud-based accounting services and provides comprehensive services including assurance, business advisory, tax, risk advisory and healthcare management. The Firm’s professionals specialize in industries including construction & real estate, healthcare, manufacturing & distribution and utilities.

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