Operating Leases Recorded on a Balance Sheet?
It’s true! The Financial Accounting Standards Board (FASB) released their “exposure draft” requiring companies to record leases on their balance sheets as a “right to use” asset and a corresponding liability. The value of these assets and liabilities would be based on several estimates such as lease term, payments, present value calculations, etc., and these estimates would require periodic assessment.
Currently, operating leases are considered off-balance sheet transactions in which the obligation is not recorded as a liability on the balance sheet; rather a footnote disclosure is embedded within the financial statements. The exposure draft treats operating leases similar to capital leases. Once this exposure draft is finalized and agreed upon by the board, all existing operating leases will need to be valued and included on the balance sheet for the remaining term period.
For presentation purposes, the “right to use” asset will be presented within property, plant, and equipment as a separate line item, the liability of the lease payments using the effective interest method will be presented separately from other liabilities, and the related amortization and interest expense arising from these lease contracts will be presented separately on the income statement. In regards to the statement of cash flows, the cash payments on the leases would be classified in the financing activities section.
The disclosures or accounting for operating leases could have a significant impact on the financial statements of a company. Covenants or meeting certain ratios to obtain funds from lending institutions might be strained due to percentages calculating below the minimum level.
This exposure draft has been changed several times since the initial draft issuance, however closure appears to be arriving in the near term and all companies will need to adhere to this accounting standard. Before you make a decision, you need to be sure that you understand all of your options and the implications which they may have on you and your business.
Anstiss & Co. is a Lowell- based public accounting firm serving clients throughout the United States. The firm was founded by Ray Anstiss, Sr. in 1964, and is currently listed as a Top-35 Accounting Firm in Massachusetts by the Boston Business Journal.
