How New FASB Lease Accounting Rules Will Affect Your Reporting

In late-2001, the world was introduced to the fraudulent accounting practices of Enron – the same practices that eventually led to them filing for bankruptcy.

This began a domino effect of sorts as other large corporate accounting scandals were discovered soon after. Public confidence in the US securities market waned and investors lost billions of dollars. By mid-2002, the Sarbanes-Oxley Act was enacted, imposing stringent requirements on US public company boards, management and accounting firms.

As part of the fallout, the way companies lease vehicles came under scrutiny. In mid-2006, both the Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB) began to consider rewriting lease accounting rules. In the eyes of many, FAS 13 allowed US companies to treat what is fundamentally a capital lease as an operating lease. As a result, the US market predominately used Open End leases for fleet vehicles while the rest of the world only considered Closed End leases the “true” operating lease.

The long-anticipated changes to leasing standards for American Companies were announced in November by the FASB. The final terms will be announced sometime early this year, but at this point the implementation dates will be separate for public and private companies.

Typically, equipment, vehicles (fleet), and even real estate are expensed when leased. The new FASB rules will require leases to be included on the balance sheet, with capital and operating leases handled in a separate way.

CFO's will be challenged to take into consideration leasing length and life cycle. What may be more urgent is how adding existing lease obligations to the balance sheet could relate to debt-to-equity covenants with their banks.

Although the new accounting rules will not have to be fully implemented until 2019 or 2020, it is a good idea to start strategizing now.

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