WHAT’S THE BRIEF?
Companies that report under generally accepted accounting principles (U.S. GAAP) will be required to recognize leases as right-of-use (ROU) assets on the balance sheet and liabilities for those assets. Leased assets include both real and personal property with lease terms of one year or more. The result will be higher valued assets and additional liabilities recorded after adoption. For companies that are lessors of real and personal property, the accounting remains largely unchanged under the new standard.
FASB issued the new standard to increase transparency and comparability among entities by recognizing leases on the balance sheet and providing more information about leasing arrangements so that users can assess the amount, timing, and uncertainty of cash flows from leases.
WHAT IS THE IMPACT?
Implementing the new lease standard means changing how Companies account for individual leases, but it also means changing how Companies think about financing and reporting for leases. In particular, implementation is likely to cause a minor to significant change assets and liabilities reported on the balance sheet which has the potential to impact compliance with debt covenants. Companies may want to consider changes in policies surrounding entering into long-term leases and developing an effective tracking system for leases.
WHAT IS THE EFFECTIVE DATE?
The effective date for non-public entities is fiscal years beginning after December 15, 2021 and interim periods within fiscal years beginning after Dec. 15, 2022.
For calendar year companies, the standard goes into effect on January 1, 2022. For companies with a June 30 year-end, the standard goes into effect on July 1, 2022.
WANT TO LEARN MORE? Click here to access the KWC Lease Accounting Guide for Clients.