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12.27.18

More Lease Accounting Rules: Changes to Accounting for Leases
Laurence Sophian

As you probably know, there are some significant changes to not-for-profit financial reporting that will affect your calendar 2018 and fiscal 2019 financial statements. Depending on the type of revenue streams that you have, the rules regarding how you recognize revenue may also affect your financial statements. However, these changes will not occur until calendar 2019 and fiscal 2020 statements. But, we are not done. Coming in calendar 2020 and fiscal 2021 are changes to the way you account for and report any leases you are a party to, whether as a lessee or lessor.

Capital Lease or Operating Lease?

Historically, leases have been accounted for as either a capital or operating lease. A capital lease is a lease that meets certain economic criteria and is currently accounted for as if you had purchased a capital asset and financed it over the term of the lease. If the capital lease criteria are not met, the lease is accounted for as an operating lease—each month you pay the rent is and charge it to an operating expense. In today’s world, most leases are accounted for as operating leases.

Leases under the new rules

Under the new rules, most leases will be treated similar to the present accounting for  capital leases. This means that you could be reporting more capital assets and more liabilities on your statement of financial position. If you have bank covenants or other financial arrangements that are contingent on your meeting certain financial ratios, it is possible that this change in accounting could impact your ability to do so.

Of course, these changes are not coming for a couple of years. With other significant accounting changes coming before the new lease rules are effective, why write about these now?

Existing Leases and New Leases

If you have existing leases that will still be in force when these rules go into effect, or if you are planning to enter into a new lease between now and then, you may want to consider the effects of these rules and what impact they will have on other aspects of your finances. Once in force, these rules will apply to all leases—those that have been in operation before the effective date and continue until sometime after that date, and those that are entered into at the time the new rules go into effect and beyond. This means that if you have existing leases or are planning to enter into a new lease, you may want to start looking at what the impact of these rules are as soon as possible.

As noted above, these rules will go into effect for years beginning on or after January 1, 2020. We will certainly be providing more detailed information on how these rules work between now and then. In the meantime, you may want to start considering how the new rules will impact your financial statements so that you are prepared for 2020.

For more information, contact Larry Sophian at lsophian@orba.com, or call him at 312.670.7444. Visit ORBA.com to learn more about our Not-For-Profit Group.

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