BMO Harris Bank
MAY 2016
Equipment Finance
Four things you should know about
the new lease accounting rules
Changes are coming to the U.S. Accounting Standards that will affect
lease accounting requirements. These changes have been in the works
for more than 15 years and will begin to take effect in 2019. As we move
closer to the compliance deadline, there are a lot of misconceptions
about how the new rules will affect businesses, especially when it
comes to equipment leases.
There was some concern that the Financial Accounting Standards Board (FASB), which
regulates U.S. standards, and the International Accounting Standards Board (IASB) would
unify their standards and treat all leases as debt, meaning the full liability would appear
on corporate balance sheets.
The good news is that didn’t happen. FASB and IASB will continue to maintain separate
standards, and the FASB changes are less drastic than originally feared. But there’s still a
lot of confusion among businesses about how the new rules affect balance sheet treatment
and tax benefits.
For our purposes, we’ll focus on the updated FASB standard. Below are answers to questions
we get most frequently about the changes.
But this isn’t the only document you’ll need. We recommend that senior finance executives
review the entire standard as well as consult their accounting and compliance experts. For more
detailed information about the new FASB requirements, visit the Equipment Leasing and
Finance Association’s lease accounting resources at www.elfaonline.org/issues/accounting.
by Jud Snyder
President
BMO Harris Equipment Finance
Let’s connect
414-765-8004
[email protected]
How will the new rules affect my balance sheet?
For accounting purposes, there are two types of leases: finance leases and operating leases.
The major change relates to operating leases, which has been a key financial instrument for
many companies. These leases used to be entirely off-balance sheet.
There’s still a lot of confusion among businesses about how
the new rules affect balance sheet treatment and tax benefits.
Continued
Four things you should know about the new lease accounting rules
Under the new FASB rules, there will be a balance sheet requirement
for operating leases. They will be considered a “right-of-use” asset
that incurs a liability. However, the entire cost of the asset will not
be required to be on the balance sheet — only the present value of
your obligated payments.
In most cases, the asset amount of an operating lease will be lower
than the cost of an outright equipment purchase, which means
companies will still realize benefits in terms of lower capitalization
than a finance lease or traditional loan structure.
There is no change to the way finance leases (previously known as
capital leases) will be accounted for. Under FASB rules, these leases
are treated as debt, like a traditional bank loan. The entire liability
must be recognized on your balance sheet.
Will the new rules change the tax benefits
associated with equipment leasing?
No. While the new rules will affect the way you prepare your
finances under GAAP, they won’t change how your tax basis is
calculated. Also, nothing in the revised standard will have an impact
on the lease contract options available to you.
Will the new rules change the way banks view my
company’s finances?
When do the new rules take effect?
For public companies, the new requirements apply to fiscal
years beginning after Dec. 15, 2018, which means their financial
statements must comply with the updated standard in 2019. For
private companies the transition takes effect one year later.
It’s important to note that the Securities and Exchange Commission
requires three years of comparative income statements and two
years comparative balance sheets. That means public companies
should start capturing data for reporting in 2017; private companies
should begin in 2018.
A favorable compromise.
Generally speaking, this is a positive result after years of
discussion and uncertainty regarding the financial treatment of
lease contracts. Through multiple exposure drafts, comment letters
and deliberations, the FASB has ended up in a place that achieves
their goal without jeopardizing a well-established and widely used
source of capital for business expansion.
While the details may take a few years to sort out, borrowers
can be assured that the financial products they have used to
grow their businesses in the past will remain viable options to
them in the future.
With operating leases now partially on balance sheet, financial
statements will show slightly higher leverage levels. Most banks,
however, were already taking off-balance sheet obligations into
account when conducting their analyses.
We don’t anticipate any changes in your ability to borrow based on
the new FASB balance sheet requirements. If anything, requiring a
portion of operating leases to be on balance sheet streamlines the
reporting process, which can help your financial partners make their
lending decisions more efficiently.
Banking products and services are subject to bank and credit approval. BMO Harris Equipment Finance Company
is a wholly owned subsidiary of BMO Harris Bank N.A. Member FDIC.
© 2016 BMO Financial Group (05/16)
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