Companies that have not evaluated the effect of the new lease accounting rules should not delay in getting started. The new rules, which take effect in years beginning after December 15, 2019, will require operating leases be recorded on the balance sheet as a lease obligation with a corresponding “right of use” asset. The asset will be amortized to expense over the life of the lease. Currently, these leases are not reflected on the balance sheet but are expensed as payments are made.
While it may feel like there is plenty of time to assess the impact of the new rules, companies should know the effects the new rules will have on their financial statements as they negotiate new leases and debt agreements in the years leading up to implementation. The new rules can get complicated so we expect the evaluation process to be time consuming. For instance, Companies will need to evaluate many factors including lease and non-lease components, discount rates, renewal options, below market rents, and variable lease payments, to name a few. Leases under negotiation today will affect your balance sheet years from now upon implementation of the new rules and may, in turn, affect compliance with loan covenants. You can benefit from knowing the impact of the new standards as you negotiate new leases and loan agreements today. Hertzbach is ready to work with you to help determine how the new standards will affect you. Reach out to us at firstname.lastname@example.org or 800.899.3633.