The Rules of Thumb blog from MoneyThumb strives to keep our readers educated and informed, especially when it comes to things affecting changes to accounting. One big change that is headed our way concerns the standard for lease accounting. Companies lease a wide range of resources. Of course, real estate is the main thing, but equipment, airplanes, and other expensive assets that a company does not want to outright buy are often leased. The advantages of leasing include reducing the risks of asset ownership, raising funds, obtaining tax benefits and having greater flexibility to adapt to technological developments and changing business needs.
As most accountants know, next year, 2019, businesses will be required to record leaseholds on their accounts in a very different way. While your client's business cash flow won’t see any changes, the revised leasing standard will have a big impact on their financial statements. Today the Rules of Thumb blog from MoneyThumb would like to help our accountants who read our blog understand everything you need to know about the new lease accounting standards coming up next year. We know a lot of accountants spend their time during tax off-season education themselves about next year's tax laws and changes. This blog post should help you do that when it comes to the new lease accounting standards.
Do You Understand the Upcoming Changes to Lease Accounting?
Under the current accounting standards, leases must be defined as either finance or operating leases. Operating leases are treated as expenses on your income statement, leaving the balance sheet unaffected. Finance leases, on the other hand, are treated as both assets and liabilities on the balance sheet.
The new rules will apply to public companies starting January 1, 2019, and to nonpublic companies the following year. The most significant change is that the distinction between operating leases and finance leases will disappear, meaning that all leases will be capitalized. Trillions of dollars worth of leases are expected to be brought onto company books as a result. In addition, most operating leases will see a higher income statement impact, to begin with, meaning that the cost of leases will initially be higher. Public companies will be required to retrospectively apply the new standards to their 2017 and 2018 financial statements, with nonpublic companies expected to do the same for 2018 and 2019.
More leases on balance sheets mean assets and liabilities will increase for many companies whose accounting you handle. You might want to suggest your client consider short-term leases to offset the effect on their financial statements. Given that some of the fiscal advantages of leasing will be reduced, you could also tell your accounting clients who lease that their business should reevaluate the merits of ownership. If your accounting client is a real estate professional, advice them to urge their clients to consider their portfolios as soon as possible so as to assess the potential impact of the accounting changes and explore alternative strategies for dealing with them.
As well as calculating the monetary value of any leases added to the balance sheet, your accounting clients who lease will need to look into how their accounting software will handle the changes and whether they’ll need to make any updates. This is the perfect time to suggest they use the PDF Financial File Converters offered by MoneyThumb. When things get more complicated for accountants and their clients, using the MoneyThumb tools makes transitioning to a more updated accounting software a piece of cake.
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