Are You Ready to Capitalize Your Operating Leases?
Yes, you read the title correctly. On August 17, 2010, the Financial Accounting Standards Board (FASB) published Proposed Accounting Standards Update: Leases. The proposed standard is designed to significantly change accounting practices for operating leases under generally accepted accounting principles (GAAP). In essence, the proposed standard does away with the concept of operating leases. Instead, all leases will need to be capitalized.
The basics: The FASB determined the right to use the leased asset qualified as an asset and the obligation to pay under the lease qualified as a liability to the lessor and, as such, should be recorded on the balance sheet.
What's the effect? In general, the new standard would require all leases to be capitalized as early as 2013 (timing is subject to final FASB approval). If a company has a significant number of leases or leases that extend a number of years, this could greatly increase the liabilities the company reports on the balance sheet.
Why is the FASB changing the rules? This proposal was issued in conjunction with an International Accounting Standards Board proposal and appears to be yet another step in the convergence of U.S. and international accounting standards. The current classification of operating leases results in many financial statement users having to adjust the financial statement to estimate the effects of the operating leases on the financial performance of the company. This proposal eliminates this analysis.
Berntson Porter & Company will stay tuned to this proposal and keep our clients and users of the financial statements informed as to the impacts of this proposed standard.
For more information, please contact Mary Actor, CPA at firstname.lastname@example.org, or 425-289-7608.
Look for Mary Actor's contribution to the August 27, 2010 Puget Sound Business Journal front page article, Real Estate Tsunami Ahead, Leasing rule changes will hit net income and balance sheets.