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In the News: New Lease Accounting Standards Come With Gotchas

The recent leasing rules from the Financial Accounting Standards Board and the Governmental Accounting Standards Board are turning out to be harder to follow than many organizations expected.

Not only do the new leases standards, FASB’s ASC 842 and GASB’s Statement No. 87, require entities to put operating leases on the balance sheet for the first time ever, but they come with extra complexities. Entities will need to evaluate all contracts relating to the right-to-use assets for recognition in financial statements. Meanwhile, GASB 87 requires all leases be reported as financing activities, which affects how entities report expenditures in governmental funds. Other areas such as quick ratios, debt ratios, and earnings before interest, taxes, depreciation and amortization, or EBITDA, can be affected as well, and they could have an impact on future compliance with an organization’s current loan covenants or its ability to secure new financing.

Many organizations have yet to comply with the new standards.

A recent survey by LeaseCrunch, a provider of lease accounting software, found that 41% of GASB and non-public FASB clients have not yet completed implementation of the new GASB lease standard, which is supposed to be implemented for fiscal years starting after June 15, 2021. Nearly half (48%) of clients said they won’t adopt early implementation of the new leases standard. Incremental borrowing rates (50%), lease terms (28%), and fair values and effective lives (9%) were cited as the three top problems facing respondents. The survey found 22% of the respondents have not completed their lease inventory, and over 80% said their clients’ leases had been affected by COVID-19.


You can read the full article on Accounting Today here.