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New Accounting Rules Require All Leases on Balance Sheets

November 12, 2015, by Paul Clinton - Also by this author

Photo via FASB.org.
Photo via FASB.org.

The Financial Accounting Standards Board (FASB) has voted to move forward with a new standard that would require companies and organizations to include lease obligations on their balance sheets, a move that's being greeted with cautious optimism by fleet management companies.

Fleet management companies who spoke with Automotive Fleet said the new standards shouldn't have a seismic impact on their fleet clients.

"It won't change companies' ability to borrow," said Shlomo Crandus, chief financial officer for Wheels, Inc. "The lessors will make sure their clients have the information they need. I would tell the fleet manager to talk with their fleet provider. Then they should talk to their accountant."

Companies leasing vehicles through Merchants Fleet Management have already begun moving toward this reporting method, said Tom Coffey, vice president of sales and marketing.

"In some cases, we have seen customers go toward capitalized leases than treating them as operating expenses," said Coffey. "It has a lot do with the fleet, true operating expense or cost that should be capitalized. Whether it's a small company or a large one, they're dealing with the physics of accounting."

Larger commercial fleets may have an easier time adopting the new accounting methods because they often have systems in place that track other large assets such as real estate.

"Larger companies maintain systems to account for real estate and other leases," said Beth Kandrysawtz, chief executive of Motorlease. "They will not have a problem but for a smaller company, they're going to be looking to their leasing company for more guidance and direction. It will be important for these companies to work with lessors who understand the challenges of a smaller business."

Fleet leases typically fall into two categories, including open-end (operating or capital) leases and closed-end (operating) leases. Companies have been able to use operating leases to keep assets off their balance sheets and treat lease payments as a rental expense.

The current approach is known as the risk-and-reward method, and the lessor is viewed to be taking the risks and rewards of asset ownership.

Under the new standards, companies would need to take a right-of-use approach to account for lease contracts. Lease assets and liabilities will now need to be recorded at the net present value of the future payments.

"The goal is to include the assets and liabilities on the balance sheet," Crandus said. "The amount that goes on the balance sheet is going to be determined based on the contractual term."

The new standards shouldn't affect a company's financial ratios such as their solvency ratio and leverage ratio, and should not affect their ability to borrow. The way open-end lease expenses will be recognized on the income statement should not change. Companies will establish a lease asset and liability at the start of each vehicle lease and include the remaining lease assets and liabilities at each reporting date. The new standards will not affect tax treatment of lease contracts, Crandus said.

The final standards, known as the Accounting Standards Update (ASU), would be published in early 2016. Public companies must comply for fiscal years beginning after Dec. 15, 2018, and private companies have until annual periods starting after Dec. 15, 2019.

The move comes after a push by FASB and the International Accounting Standards Board (IASB), which fielded concerns from investors and the Securities and Exchange Commission (SEC) about a lack of transparency on financial statements.

"After more than ten years of work, the Financial Accounting Standards Board is set to release new lease accounting standards in early 2016," said David Dahm, chief financial officer for LeasePlan USA. "The original objective was to have a set of lease accounting standards in line with the international accounting standards. However, it is almost certain that two sets of standards will still exist. Although both will likely be changed."

Read the full FASB release here.

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