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3 Steps to Prevent Costly Implications From New Lease Accounting Standards

03/28/2018  |  By: Buck Freeman, CPA, Senior Manager, Audit

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Business owners, CFOs should take steps now to prevent costly implications from the new lease accounting standard

If you are a business owner or CFO, you’ve almost certainly entered into a lease agreement. More than likely, your company has multiple leases - whether for a copier, company vehicles, or office space. Did you know that if any of your leases mature after Jan. 1, 2019, your bottom line could be affected unless you act now?

Why? The Financial Accounting Standard Board (FASB) recently issued Accounting Standards Update 2016-02 Leases (Topic 842) to provide enhanced transparency into companies’ off-balance sheet lease obligations and financial statements. Although the changes take effect Jan. 1, 2019 for public companies and Jan. 1, 2020 for non-public companies, waiting until then to prepare for this standard could be costly for your business. Here’s what you can do now to make sure you – and your Company’s stakeholders – don’t get blindsided.

Take Inventory

The new standard stipulates that you have documentation on every lease your company has entered and gathering the required data is a massive undertaking for most. Under the new standard, other contracts will also need to be considered for potential embedded lease agreements. Examples of contracts that may contain previously unidentified lease components which need to be analyzed are service agreements, bundled service arrangements, and data service arrangements.  Waiting until the last minute will put an overwhelming burden on your accounting team, and you may come up short. Get boots on the ground now so you have time to complete the process.

Implement a New Process

Once you’ve finished taking an inventory and documenting your leases, implement an updated system that accounts for the new FASB requirements. Consider using software to automate the process, and consult an expert who understands the nuances of the new standard to make sure you are compliant when it takes effect.

Communicate with Stakeholders

Discuss the implications of the new standard with your investors and lenders now. Don’t assume they are well-versed in all the complexities – or even know about the FASB changes. They may rely on experts to stay informed. If you don’t feel you can effectively communicate the intricacies of the new standard to your stakeholders, bring in an expert to lead the conversation. If debt covenants need to be modified, it’s better to find out now while you still have time. Be proactive to ensure a smooth transition.

As the clock is ticking, it’s advisable not to wait to begin taking steps. A year-end audit is a perfect time to ask your auditor what you need to do to prepare for these changes. Consult an expert who knows the standard inside and out so you don’t leave anything on the table.

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Posted in: Healthcare, Audit