Starting next year, public companies will be required to report operating leases as liabilities. Under this new rule by the Financial Accounting Standard Board, companies will be required to add to their books the debt-like obligations they incur to lease real estate, office equipment, airplanes, and more.
The Wall Street Journal estimates $3.3 trillion in operating liabilities to be worked into the corporate balance sheets of public companies due to this change. While these operating leases are currently resting in the footnotes, they will be front and center in next year’s financial reports.
The change leaves CFOs questioning whether they should renegotiate lease terms, provide specialized reports to lenders, or risk having their debts called by lenders. Legal fees, bank fees, and other fees, fines, and expenses could apply, and the corporate debt-to-earnings ratios will be disrupted, affecting borrowing power.
While the new rule is intended to improve transparency for investors and lenders and bring the U.S. closer to global accounting standards, compliance will result in time and money spent to observe the new rule. This could require new accounting processes or even new accounting software, not to mention the time and expense of staff training. This is undoubtedly a blow to the bottomline for many public companies who are now scrambling to gear up for this regulatory change.
While some CFOs will be seeking to amend loan terms, others may opt to produce one set of financials for regulators and yet another set for lenders. For some, the extra time to produce two different sets of reports is the best available option when the other option could involve hefty bank and legal fees.
As accountants and finance professionals, there is no time better than the present to familiarize yourself with the regulatory change and how it will affect U.S. business to ensure that your books–or your clients’ books–are ready.
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