How Will the New Operating Lease Accounting Standard Impact Your Company?
If you've ever run into a situation where you needed to lease a space for your business, you've run into an operating lease. The FASB has a new operating lease accounting standard going into effect at the end of this year, which is planned to bring the US into alignment with international accounting standards. Where does your business stand with regards to this type of lease and how will this new accounting standard impact your business?
Here's a quick look to help get you started.
According to a recent Wall Street Journal article, there are currently about $3.3 trillion in operating leases in the US that, due to the new accounting standard, will switch from their traditional place in the footnotes of a business' financial statements to the liabilities section of the balance sheet. Though that amount, spread out over the millions of businesses across the United States, may not seem like a lot, some businesses are expected to see a climb in their liability levels to between 200-450% of their current levels.
This can impact a business' ability to obtain financing for new equipment, cash flow or expansion. Though it doesn't change the amount that the business is currently paying out on these obligations, it can inflate the appearance of debt-to-equity ratio on the balance sheet, making a business appear to be a worse risk than it may actually be.
However, the asset side of the balance sheet will also be affected by this change in the operating lease accounting standard. To balance this new liability, the asset of the right-to-use the property being leased is included on the asset side, as the value of the property's use is added into the system. This can lower your return-on-investment numbers without any changes really taking place.
The impact of the new operating lease accounting standard on your business could be huge, or it could be relatively minor, depending on how much of your liabilities it will make up as you enter the new year. Fortunately, there are strategies available to help you deal with these issues. If you're not quite sure how to implement them, the accounting professionals at AccountRely can help. Please feel free to reach out today to get started.