How Will New Leasing Standards Affect Business/Banker Relationships?
Posted 8-24-2011 | By Mark Gibbs | Download Article
By now, you are most likely aware that leasing standards will change in the near future as the Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB) are committed to eliminating "off-balance sheet" accounting for leases. But do you know how these changes will affect the business/banker relationship?
For starters, a banker drafts loan agreements based on current accounting rules, so with significant leasing standard changes, you can expect significant loan agreement changes. Based on the proposal for leasing standards, the biggest impact would be felt by companies with a large number of operating leases.
Because current bank agreements may need to be amended to reflect new financial statement presentation requirements, it's important to begin a dialogue with your banker. You may even consider connecting your CPA with your banker to discuss the proposed accounting rules, the potential impact the accounting changes will have on current bank agreements, required amendments or adjustments to remain in compliance, and expected future changes.
Financial statements will be significantly different as items that used to be expenses will now be recorded as assets and liabilities. According to the latest guidance on the proposed standard, a "right of use" asset needs to appear on the balance sheet with a corresponding liability equal to the present value of the future lease payments. This newly created asset would then be amortized over the lesser of the useful life of the asset or the lease term.
FASB and IASB are re-exposing revised proposals for comment on revisions made since the publication of the exposure draft in August 2010. The exact schedule for the release of a revised exposure draft and adoption has not been finalized; however we will keep you updated on progress. In the meantime, if you haven't started to talk about the expected changes with your banker and/or CPA, we recommend getting started. Please contact Mark Gibbs, CPA, at mgibbs@hlbtr.com or 651-407-5840 with any questions.