Accounting requirements that were introduced more than 30 years ago are undergoing reform. The International Accounting Standards Board (IASB) and Financial Accounting Standards Board (FASB) have introduced new guidance on leases that real estate and finance teams need to be tracking against from 2017 onwards. Here are six key aspects of the change to know:
1. While the changes are set to take effect in 2019 with a 2-year look-back period, come 2017, companies will need to track and record all data relevant to the new standards.
2. A report by IASB concluded that listed companies are estimated to have around US$3.3 trillion of lease commitments of which over 85 percent do not appear on their balance sheets. This means it’s highly likely that your company has many more lease commitments that are not currently being tracked.
3. The catalyst for this reform stemmed from concerns that existing operating lease models did not provide an accurate representation of leased commitments since this information was absent on balance sheets. This meant investors and analysts could not compare companies that borrowed to buy assets with those that leased assets.
4. In order to address the need for higher transparency in financial reporting, the new leasing standards require companies to present existing real estate or equipment leases directly on their balance sheets instead of in the footnotes of their financial statements.
5. The new standards will pose a significant administrative burden for companies that do not have their lease data in order.
6. In order to minimize any negative impact on financial statements, companies need to anticipate how new and existing leases will be classified and accounted for under the new standards.
View the infographic below to prepare for this change:
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