The most dramatic change — both in the United States and around the world — is the requirement for all lease assets with terms longer than 12 months to be recorded as an obligation and a related asset on a company’s balance sheet.
At present, leasing costs are typically treated as a rent expense and companies don’t have to show the total obligation for operating leases on their financial statements. A company is only required to report the impact on the profit and loss (P&L) account during the current year of the lease. Later years obligations are only mentioned as a footnote.
Under the new FASB and IASB standards, though, operating leases (thought to account for about 85% of all current leases) must be brought onto the balance sheet. The remaining 15% of leases are mostly finance leases which are not affected because they already meet FASB/IASB reporting requirements.
The second biggest change is in the way operating leases in IASB territories must now be recorded on the P&L statement. It’s a shift that will have a major impact on P&L figures for multinational companies that lease real estate across multiple countries.
Historically, the cost of operating leases has always been shown on the P&L statement on a straight-line basis throughout the full term of the lease. This practice will continue under FASB in the United States. But in the rest of the world, IASB now insists that interest leasing costs must be front-loaded. As a result, leasing expenses recorded on the P&L will be greater in the first years of the lease and lower in the remaining years. This should be considered by investors and others for a better understanding of a company’s profitability after taking the leases into account.
Another significant change is the requirement for public companies to provide side-by-side comparable accounting data for the ‘transition’ period leading up to the year in which they adopt the new standard. Under FASB, this means up to two years of historical reports for balance sheets, and up to three years of historical reports for income statements. Under IASB, the comparative requirements for the ‘transition period’ are one year for balance sheets and two years for income statements. This comparable accounting data will typically be reported in the footnotes to the financial statements in the year of adoption.
Dedicated to helping you meet the new US GAAP and IFRS Lease Accounting Standards, the Trimble Manhattan team has been thoughtful and deliberate in its development of the new Manhattan FASB/IASB functionality.
To learn more, please visit 'Are you on the road to FASB/IASB compliance?'