New Guidance on Lease Accounting Released
Companies who lease vehicles will now be required to include the leases on their balance sheets but won't have the leases counted as debt under new lease accounting rules released by the Financial Accounting Standards Board (FASB) on Feb. 25.
The move doesn't take away corporate benefits to leasing vehicles, said Norman Din, vice president of strategic sales with Wheels, Inc.
"If there is one important message for the industry it’s that the changes don't change the operational and financial merits of leasing," Din said.
The new guidance, known as the Accounting Standards Update (ASU), is designed to improve financial reporting about leasing transactions, and will require open-end and closed-end leases to be added to balance sheets. They will be counted as assets and liabilities but not debt obligations.
"I think (today's announcement) was very much what we expected and I think they've been telegraphing that for a long time," said Shlomo Crandus, chief financial officer for Wheels, Inc. "As we get closer to implementing the rules, then more of the nuance will have to be addressed, but the important parts have already been thoroughly vetted and published before (today’s ruling)."
The update will now require lessees to recognize assets and liabilities for leases with lease terms of more than 12 months.
Under current Generally Accepted Accounting Principles (GAAP), the recognition, measurement, and presentation of expenses and cash flows arising from a lease by a lessee primarily will depend on its classification as a finance or operating lease. However, unlike current GAAP, which requires only capital leases to be recognized on the balance sheet, the new ASU will require both types of leases to be recognized on the balance sheet.
View the full ASU here.