In 2016, the Financial Accounting Standards Board (FASB) updated lease accounting rules, (ASC 842) with the major change being that operating leases (under current accounting rules a disclosure item only) must now be treated more akin to a capital (or financing) lease and, as a result, organizations must now include lease assets and liabilities on their balance sheets. Under the previous standards, operating leases were off-balance sheet. That allowed companies to omit certain lease assets and liabilities from their balance sheets, which lead to the concern of possibly having their debt-to-equity ratio be misleading to the financial statement reader. The current practice also depended upon the users of the financial statement to read the footnotes of the financial statements in order to have a complete understanding of the company/organization. More and more of new GAAP, including the new lease standards, is aimed at making financial statements easier to comprehend to the so-called “average user.”
However, at its October 16, 2019 meeting, FASB extended the implementation deadline for the new standards on leases that are not yet effective for private companies and nonprofits to the first fiscal year after December 15, 2020, instead of December 15, 2019, as originally mandated.
This is good news for nonprofits because they can now take an extra year to implement the required changes. From what we have seen in our discussions with our clients in the recent audit busy season, we think that time will be of great benefit. Most nonprofit organizations have been (rightly) focused on the implementation of the new financial presentation accounting standard and the impact of new revenue recognition rules and have not yet had the opportunity to focus on the implementation challenges that the new leases rules may present. The additional time is welcome.
As nonprofit organizations turn their attention to the leasing standards, we recommend organizations begin to do the following:
- Ensure they have identified all relevant leases in business arrangements including any business arrangements that were previously not identified as leases. The new guidance can result in new conclusions as to what now meets the definition of a lease.
- Ensure that multiple departments across the organization (which will possibly be affected by this standard) are communicating effectively with each other.
- Evaluate existing systems and processes which may need to be modified or enhanced in order to provide information necessary to address the new reporting and disclosure requirements.
- Recognize that ongoing efforts to remain compliant might be more significant than the initial implementation effort. The finance department, in particular, needs to ensure it is able to record the required monthly entries to account for the new lease assets and liabilities and related p/l activity.
Nonprofits can take advantage of the fact that public companies are still required to implement the new rules (now) two years in advance of nonprofits. As a result, nonprofits can learn from their experiences and utilize best practices that emerge from the adoption. This includes utilizing technology which has been successful for implementation for public companies. As a result, there are off-the-shelf and purpose-built technology solutions that can help standardize and aggregate the information required for adoption of the new standards. If a nonprofit has a business structure that includes many operating leases that fall under the new standards, we strongly recommend consideration of such a solution.
The new standards will apply for calendar year ends beginning December 31, 2021 and for your typical March, June, or September year-end in 2022. Now is the time to work within your organization to be sure you have a complete understanding on the impact of the adoption of these new standards and to ensure that a plan is in place to make it a smooth process.