January 8, 2020
Accounting standards are continuing to change, and an upcoming change to lease accounting is a big one that lessees and lessors will definitely want to be are aware of. The new leasing standards will make significant changes to financial reporting and will require additional work and significant modifications from companies who participate in many agreements as either a lessee or lessor.
Previously, your company would either have an operating lease or a capital lease. A capital lease essentially treated assets as if you were purchasing them, and they appeared on your financial statements as such. An operating lease allowed the lessee to have use of the asset, but not convey ownership. It would, therefore, be considered off-balance sheet financing.
“With this new change clients may be able to maintain capital leases (now called finance leases) without significant changes. But anyone with operating leases will now be required to recognize a right-of-use asset and a corresponding liability,” says Doug DeBoer, CPA. “These changes take effect for public entities in 2019, and a postponement has been provided for private entities until 2021.”
You might be thinking--How is this going to affect my financial statements?
For those with capital leases, there may not be major changes. However, agricultural entities with operating leases for land, tractors, or other leased equipment who were previously expensing lease payments will be affected. These entities will have to recognize right-of-use assets and calculate their value. This may drastically change your financial statements or loan covenants because you will also have a new offsetting liability. Additionally, some entities may have to recognize leases over longer terms than previously required, such as a month-to-month lease with a related party that is expected to continue long-term.
You can count on us to help review your financial statements to ensure that you are up-to-date and correctly reporting based on the new standards. We can help you assess the impact to your financial covenants or other key performance indicators. Our team can connect you with resources to do it yourself, or we can help you with implementation. For more information about lease accounting for your ag entities, contact Doug DeBoer, CPA, at firstname.lastname@example.org or 209-527-4220.