This may have a significant impact on bank loans, as adding operating leases – which appear as debt – to the balance sheet may affect loan covenants by changing the amount of debt you are carrying. As a result, your business could slide into default on your loans without realizing it. The solution is likely to be a renegotiation of loan covenant terms, or a waiver or change in your lease agreement.
While the official effective date of the new accounting standards is not until January 1, 2020 for private companies and non-profits, and late 2019 for public companies, early adoption is recommended so the time to take action is now. Start by examining existing leases, how they will be reported, and how their inclusion on your balance sheet will affect bank loans. Even if you do not have loans covenants, you will want to begin updating your financial statements within the next year, well ahead of the changeover.
It will be the responsibility of your organization to adjust the way leased assets are classified and reported. Your CFO or Controller, working with your CPA, should begin to determine how this change will affect your company as soon as possible so that you are prepared in advance to meet the deadline for the new standard.
Gray, Gray & Gray can help you wade through examination of leased assets, help determine the proper reporting format, calculate the effect of capitalization, and adjust covenant and lease terms.
You can also contact Gray, Gray & Gray at (781) 407-0300 for additional information or visit the Financial Accounting Standards Board (FASB) website.