Discover how ASC-842 GAAP accounting rules may impact your decisions on operating and finance leases.
As more companies consider conserving cash by investigating leasing and other financing options, understanding the intricacies of lease accounting standards becomes crucial, especially with generally accepted accounting principles known as GAAP.
The implementation of ASC-842 GAAP accounting rules were developed to mirror international accounting standards, changing the accounting for some lease configurations that historically hadn’t appeared on balance sheets in the past.
Impact of GAAP accounting changes
In general, the new standards improve transparency of off-balance sheet leases, increase comparability between companies with different lease operating models, and ultimately reduce off-balance sheet financing.
“For years, companies have been reporting leases under a different set of rules,” says Pete Georgelas, Director of Business Development Capital Equipment Group at U.S. Bank Equipment Finance. "Suddenly, all leases were going to be reported on balance sheet. As a result, our clients have to ascertain how they were going to manage reporting, not only future lease transactions, but leases they already have on their books."
The new accounting rules were phased in for different kinds of entities. They went into effect for publicly held entities for fiscal years beginning after December 15, 2019 (2020 calendar year), but privately held entities received more time to adjust. For them, the new rules began for fiscal years after December 15, 2021 (2022 calendar year) and interim periods after December 15, 2022 (2023 calendar year).
“It gives clients a whole new set of factors to consider,” Georgelas says. “For example, under the new accounting rules, a sale-leaseback with a contractual fixed buyout option will poison the well for operating lease treatment. Prior to implementation of the new accounting rules, you could do a sale-leaseback with a contractual fixed buyout option and still structure it to technically be qualified as an operating lease. Under the new accounting rules, this structure will be reported as a Loan Liability.”