In February 2016, the Financial Accounting Standards Board (FASB) announced changes to its standard on lease accounting. While this may not sound exciting, the change is very important for any business that leases real estate or other property.
FASB is a self-regulatory body that establishes the Generally Accepted Accounting Principles, or GAAP, which are used by American accountants. The new lease accounting standard requires a business to account for all long-term leases—i.e., those longer than 12 months—on its balance sheet. To do so, the business must classify the amount it owes on the lease as a liability, and its right to use whatever is being leased as an asset. The FASB standard explains in depth how to calculate these amounts.
Though the standards won’t start to come into effect until the fiscal year after December 15, 2018, it’s important to be aware of the changes and prepare. Businesses that have large outstanding lease balances will have more liabilities under the new standard—which could affect their ability to get a loan or attract investment. Business clients should take an inventory of their current lease agreements and talk with their accountants to see if the new lease accounting standards will significantly impact their balance sheet.