The Financial Accounting Standards Board (FASB) has voted to move forward with a new standard that would require companies and organizations to include lease obligations on their balance sheets, a move that's being greeted with cautious optimism by fleet management companies.
The final standards, known as the Accounting Standards Update (ASU), would be published in early 2016. Public companies must comply for fiscal years beginning after Dec. 15, 2018, and private companies have until annual periods starting after Dec. 15, 2019.
The move comes after a push from the International Accounting Standards Board (IASB), which fielded concerns from investors and the Securities and Exchange Commission (SEC) about a lack of transparency on financial statements.
Fleet leases typically fall into two categories, including open-end (finance or capital) leases and closed-end (operating) leases. Under a finance lease, the leased asset is recorded on the lessee's balance sheet. Companies have been able to use operating leases to keep assets off their balance sheets and treat them like rentals.
The current approach is known as the risk-and-reward method because the lessor is viewed to be taking all of the risks and rewards of asset ownership.
Under the new standards, companies would need to take a right-of-use approach to account for lease contracts. Lease assets and liabilities will now need to be recorded at the net present value of the future payments.
The new standards will affect a company's financial ratios such as their solvency ratio and leverage ratio. The company's balance sheet will lengthen, and the way lease expenses will be recognized on an income statement will change. Companies will also need to reassess the lease liability at each reporting date. The new standards also may affect tax treatment of lease contracts.
Read the full FASB release here.
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