Why should you care about the new leasing standard?

Are your company’s financial statements prepared under generally accepted accounting principles? Does your company have signed rent or lease agreements for office space, warehouse space, rent, land, or equipment? Do those agreements include services, supplies, or maintenance? Does your company have existing contracts not called leases that might have a lease component?

Beginning 2022, private companies who prepare financial statements that conform to generally -accepted accounting principles (GAAP), will be required to report operating leases differently than they have in the past.

The new leasing standard was developed to provide transparency to users of a company’s financial statements. The big difference: lease and rental contracts you have signed but are currently expensing when paid as rent or lease expense, may now have to appear as a liability and asset on your balance sheet.

For example: Assume you signed a lease to rent a building for $10,000 per month for a period of 10 years. At the end of 2022, you have 5 years left on the lease. Under the old standard, you would record rent expense each month for a total of $120,000 by the end of 2022 and write a footnote disclosing future payments. Under the new standard, the expense will be similar, but you will also record a liability and asset on the balance sheet at the present value of the remaining $600,000 of lease payments. That is a big difference!

Why does it matter that you are informed about the new leasing standard?

It matters because it affects the amounts of assets and liabilities on your balance sheet, which may affect your ability to attract investors or other users of your financial statements. Also, it may affect the requirements of lenders, which can include covenants for certain leverage or debt service coverage ratios. Contracts that you may not have considered leases under the previous standard(s) may be considered leases under the new standard. Even if your company does not prepare financial statements under GAAP, investors and lenders may still want to know more about rent and lease expenses. It is important to understand what they are looking for and which questions they may ask.

We welcome your  questions  about the new leasing standard and the potential impact on your financial statements. Also, watch for Carrie Ommen’s blogs, where she  discusses the new leasing standard in more detail, including how the new accounts will look on your balance sheet and how the amounts will be calculated.

For additional considerations, please reach out to Gretchen Otto, CPA, Associate Director, or contact our Business Solutions team at Mahoney to be of help to you in any way.