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What is the new lease standard?
The new lease standard is intended to account for all lease obligations on financial statements, rather than excluding operating leases as has been the standard. This change ensures that a company’s financial situation is reflected as accurately as possible within the financial statements.
With the new standard, all leases must appear on the balance sheet as a Right of Use and Lease ASSET and Lease LIABILITY.
What qualifies as a lease?
- It must be a physical asset
- You must have the right to control or use the asset
- The asset must be explicitly or implicitly defined
Included
- office rent
- computers, copiers, servers
- vehicles and equipment
Excluded
- inventory
- assets under construction
- intangible assets
- exploration / non-renewable resources
What is the impact of the new lease standard?
There is a potentially significant impact to your organization’s balance sheet.
- BALANCE SHEET: Adding lease liabilities can impact your compliance with debt covenants.
- POLICY ELECTIONS: The new lease standard requires companies to make policy decisions about how they will handle leases. Early on, your organization needs to review and decide on the policies that are right for you.
- PROCESS AND CONTROLS: The new lease standard requires these decisions to be documented and available for accounting, which introduces a need for new systems, processes and controls.
How we can help.
The steps to implementing the new lease standard are complex. We are here to help. This process will take time and CBM plans to begin the process by mid-2022.
CBM will help create the scope of your implementation process and execute:
- Policy elections for your lease portfolio
- Present value of future lease payments based on 1. rate implicit in the lease (if N/A then), 2. borrowing rate of organization (if N/A then), 3. risk free rate
- Monthly journal entries based on complex calculations
- Create required footnote disclosure on the financial statements
CBM’s outsourced accounting and advisory group: Our goal is to make running the back end of your business look easy, so that you can focus on what matters most. Our experts in business strategy, markets, audit and tax will partner with you to set and exceed your organization’s goals.
Please contact Dominick V. Bellia via our online contact form for more information.
Councilor, Buchanan & Mitchell (CBM) is a professional services firm delivering tax, accounting and business advisory expertise throughout the Mid-Atlantic region from offices in Bethesda, MD and Washington, DC
