In a new video, Key Equipment Finance's Peter K. Bullen, senior vice president, bank channel, explains what businesses need to know about the the new lease accounting rules released earlier this year by the Financial Accounting Standards Board.
For public companies the transition to the new lease accounting rules will occur in 2019 in financial statements for periods beginning after December 15, 2018. It should be noted that the U.S. Securities and Exchange Commission (SEC) requires three years of comparative income statements and two years of comparative balance sheets. For public companies, 2017 is the start for capturing data for reporting in 2019. For private companies, the transition year is one year later, or 2020.
The simple truth is that compared to the accounting treatment of a traditional loan or purchase transaction, leasing is still a prudent equipment acquisition strategy. Here's why:
- An asset value is booked equal to the present value of rents as "right of use" (ROU), and an offsetting liability entered as "obligation to pay."
- Because the liability is considered non-debt (other debt), it may not jeopardize debt-limit covenants.
- Operating leases are residual-based. Most likely, the recorded asset and liability will be less than the asset cost. The result: A lower on-book balance compared to a traditional loan.
The good news: the final lease accounting rules are much less restrictive than many options that were opposed.
Learn more from Peter in this video.