After almost a decade-long process, the Financial Accounting Standards Board is finally going to change how leases are treated on the balance sheets of American companies. Since this process has been going on for such a long time, a number of myths have sprouted up about the new lease accounting procedures coming in 2019 or 2020. Here are the five most common ones, why they're myths and what will actually end up happening:
Myth: It's not going to happen.
It's true that the process for reforming lease accounting has gone through a series of fits and starts. However, those fits and starts are over. The rules ares going into effect in 2019 for public companies and 2020 for non-public companies. Furthermore, you might need to back report to 2017, as well. This is happening.
Myth: My old leases are excluded.
Just because a lease was signed, renewed or in effect under the old lease accounting rules doesn't mean that it can continue being treated under those rules. Every lease in effect when the standard changes will need to be accounted for under the new standard. Period. Nothing is grandfathered.
Myth: The standard has been globalized.
At one point in the process, the FASB and IASB had declared a decision to create a uniform global standard for lease accounting. That didn't happen. While many of the general principles are the same, the FASB's generally-accepted accounting practice (GAAP) will not be the same as the IASB's international financial reporting standards (IASB). Among other differences, IFRS allows some low value assets to be exempted from the new rules and GAAP does not. On the other hand, IFRS treats leases as debts and GAAP does not.
Myth: Leases are going to become debt.
While, as we just discussed above, this is the case under IFRS, it will not be under the new GAAP lease accounting rules. Leases will be classed as general liabilities instead of debt.
One side effect of this decision is that the new rules will not change company's EBITDAs. Lease cost amortization will not be treated as interest, and the decreasing value of the right of use implied by the use will not be treated as depreciation. As such, the expenses for the lease will remain in the expense calculation of EBITDA, just like other operating expenses.
Myth: Leasing won't make sense anymore.
It's true that the balance sheet treatment of leasing will change with the new FASB lease accounting standards. However, that's the only thing that changes. If leasing costs less than buying, it will continue to cost less than buying under the new rules, at least from a cash flow perspective. All of leasing's other benefits, like flexibility and potential reduction of exposure to long term capital expenditures, also remain in place. As such, while you might need to change your accounting and reporting strategies, your corporate real estate strategy will likely remain largely unaltered.
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