The proposed new rules on accounting changes for leases won’t go into effect until at least 2012, but the leases you sign now will be subject to those new rules.
As a result, businesses — especially those with many leases — should begin now to familiarize themselves with the proposed changes, says Peter Eames, assurance manager at Burr Pilger Mayer, Inc.
“This is going to create a significant amount of work for companies that have a lot of leases or that have complex lease terms, such as contingent or percentage rents,” says Eames.
The comment period on the new rules closed on Dec. 15; the final standards are expected to be released in the middle of 2011, and implementation should be no less than a year after that, he adds.
Smart Business spoke with Eames about how the standards are changing, and what businesses should be doing now to prepare.
What changes are being proposed to accounting standards for leases?
In short, the old classification system, with off balance sheet operating leases, is being done away with. The proposal is for all leases to be carried on the balance sheet. Under the old rules, if your leases met certain criteria, you could call a lease an operating lease; the rent would be recognized as expense every month and the lease would never have to be recorded on the balance sheet. Additionally, estimates of contingent rents will have to be booked up front, which can become quite complex.
Under the new proposal, leases will be treated more like debt, similar to what is presently done for capital leases. If you are leasing an asset, you will record a liability on your balance sheet for your obligation to make payments, and an asset representing the right to use the leased asset over the term. The liability will be discounted so you will have to recognize interest expense over the life of the lease, while also recording amortization expense for the decrease in the value of the right-of-use asset.
Currently, if you sign a 10-year office lease, the obligation probably is not showing up on your balance sheet. Common-sensewise, if an investor wants to know about a company’s obligations, presentation of its lease obligations on the balance sheets, instead of the footnotes, is more transparent.
