Financial Executives magazine wrote an article that I thought did an excellent job of outlining the pending changes for lease accounting. These changes are coming from the joint project between the Financial Accounting Standard Board (FASB) and the International Accounting Standards Board (IASB). The article focuses on how the proposed new standards are expected to affect lessees.
Currently, under GAAP, all leases are presumed to be operating leases unless it meets one of four criteria:
If the lease meets any of the above criteria then it is capitalized and placed on the balance sheet.
FASB issued its proposed standard on February 8th, 2013 with an intent on having a revised exposure draft out later this year. In general, the proposed standard requires lessees to record as an asset and corresponding liability, the obligation to make lease payments over the term. Under the proposal:
The proposed standard will require retroactive implementation. I have read separately that final implementation may not be until 2016. If so, and you report 2 or 3 years of comparative statements, you will want to starting thinking about how this change will impact your financial statements soon. Also, depending on how many leases you have, this change could have a big impact on your balance sheet. You should start discussions today with your lenders on how ratios in debt covenants will be calculated after new lease accounting standards go into effect.