As you may already know, the new lease accounting standards demand the operating leases to be recorded on the balance sheet. Also, the current value of all future lease payments that include operation and financial lease, is recognized as lease liabilities.
Since many of the companies have implemented the new standards, the impact of the same on the balance sheet is slowly coming to the fore.
As per the latest study, lease liabilities for the average company have substantially increased. The primary cause for such a rise is attributed to the Right-of-use ROU asset and a lease liability. According to ASC 842 lease standards, both need to be recognized in the balance sheet. Moreover, according to the Wall Street Journal report, balance sheets could see an increase of close to 2 trillion dollars as the result of accounting change.
Whenever a company is searching for real estate or equipment, the experts discuss and weigh the advantages of both lease and buying. But since all leases are supposed to be on the balance sheet, such decisions will have multiplied impact. Going forward, many industries will be impacted.
Although the deadline for private companies has been extended, make sure to make the transition as fast as possible. The new standards will demand changes to both lease accounting as well as lease liabilities.
It is essential that accounting team managers should make quick decisions regarding the team members, coordination between departments, communication with stakeholders, and use of the latest technology. The use of lease accounting software is proving to be advantageous for many companies.
The new lease accounting standards have fundamentally changed the way leases are recognized on the balance sheet. Thus, it has directly impacted the financial summary or snapshot of companies. Apparently, it has affected financial institutions and healthcare industries the most.
Besides, there are other factors like digitization, changing consumer dynamics, and bankruptcies that have impacted lease liabilities. Therefore, implementing new standards and managing balance sheets will be a significant challenge.
For those companies with a large lease portfolio and multiple leases, calculations will be a major challenge as well. This is because, under the new standards, all leases with ROU asset and liability calculations need to be brought to the balance sheet.
Also, assumptions considered for a lease change frequently over a period of time. It may change the payment estimates and thus lease liability calculations. Under the new rules, there are certain assumptions such as residual value guarantee of a lease and right to exercise options for renewal, cancellation, and buying.
There are new approaches required to comply with new lease accounting standards. Therefore, it is critical that you opt for the latest technological solutions to overcome this problem. Lease accounting software will help in automating lease liability calculations. Also, it will help companies to make the transition without much hassle.
These are some of the ways in which balance sheets will be impacted by new lease accounting standards.
Yardi Corom is one the best lease accounting software which helps in making lease calculations and financial reporting easy and hassle-free. For more details, visit www.yardicorom.com.