Now that private companies are approximately one year from the deadline for complying with the new lease accounting standard, now is a good time to make sure you and those running your manufacturing operation understand the requirements of the new standard and are taking steps to prepare.
As we first explained in our initial blog on the matter, in 2016 the Financial Accounting Standards Board (FASB) issued Accounting Standards Update No. 2016-02, more commonly known as ASC 842. Its purpose is to increase transparency and comparability among organizations by recognizing the assets and liabilities that arise from nearly all lease transactions. ASC 842 is also meant to eliminate off-balance-sheet accounting to provide a better representation of an organization’s leasing activities. The change will significantly affect financial reporting in 2020.
Until now, your operating lease meant that you were able to obtain equipment or property without any effect on your balance sheet, covenants or other financial ratios. Unless you have a short-term lease of 12 months or less, this option is no longer available. Now you will need to recognize lease assets and liabilities on the balance sheet and disclose information about lease arrangements.
The buy or lease decision will need to be weighted more carefully than ever. For example, you will need to define the purpose of each piece of equipment, including whether it helps you meet a short-term production need, whether you will use it for a new venture and whether the capital investment aligns with your core manufacturing process. You’ll also need to examine your current cash position and future cash flow projections as well as how prepared your company is to respond to new industry technology. Most important is having a sound, strategic approach to your lease arrangements.
Given changes in the new tax law, all manufacturers will want to pay particular attention to changes, such as the 100 percent of expensing now allowed for purchased equipment and expanded bonus depreciation rules.
The new rules go into effect for private companies in Dec. 15, 2019 and for public companies Dec. 15, 2018. If you haven’t already done so, you will need to become familiar with the new rules and train a cross-functional team within your organization, determine any IT upgrades you will need and determine an implementation timeline with tasks assigned to team members.
Hopefully, you have a process in place to prepare for the new lease accounting standard. If not, you will want to inventory all equipment leases and real estate leases in one centralized electronic location. Any existing agreements and contracts could be interpreted as a lease, so plan to identify those as well. Separating similar categories from others for more efficient analysis is helpful.
If you spot gaps in your lease policies and procedures, now is the time to address them. Find out which require change so that you will be in good shape to fully comply with the new ASC 842.
Do you have questions about the new lease accounting standard? For more information, please contact Kevin Harris, CPA, at 214-365-2473, or or fill out the form below. Learn more about the Manufacturing and Distribution Group at Goldin Peiser & Peiser.
Note: This content is accurate as of the date published above and is subject to change. Please seek professional advice before acting on any matter contained in this article.