There are several impending updates to accounting standards, most notably the revenue recognition and leasing standards (effective 2019 and 2020, respectively, for privately held companies). These updates will require significant changes to accounting and disclosure treatment in financial statements prepared in accordance with U.S. generally accepted accounting principles. In January 2018, the Financial Accounting Standards Board issued a Proposed Accounting Standards Update aimed at easing the impact of implementing the new lease standard, which could influence a company’s decision regarding early adoption of the lease standard.
One aspect of the proposal allows entities the option to apply the provision of the new guidance as of the effective date (1/1/20 for calendar year-end for privately held companies) under a cumulative effect transition option. Companies that elect this option will neither have to restate their comparative period financial statements for effects of the new standard, nor make the required lease disclosures for periods before the effective date. This would also ease the transition, in that a lessee would not have to measure and recognize leases that expired prior to the date of application of the standard.
The proposal would also simplify the reporting and disclosures for lessors who provide related services in lease contracts. A typical example is maintenance and other services provided by lessors who, in many cases, would require separate allocation and accounting under the new revenue recognition guidance. The proposal would allow lessors that meet specific requirements an accounting policy election, by class of underlying asset, to not separate non-lease components of a contract (e.g. maintenance services) from the lease components to which they relate. This type of election was previously only available to lessees under the new leasing standard.
Due to this pending simplification and other considerations, implementing the lease standard one year early, at the time the new revenue recognition standard takes effect, may make sense for many companies. This would result in only one year of financial statements affected by a transition to new standards. Since the new revenue and lease standards are closely aligned from a lessor perspective, lessors, in particular, may find early adoption of the lease standard more efficient.
Some considerations for early adoption include:
- number and complexity of leases;
- readiness of systems and processes;
- lease expiration dates or opportunities to restructure leases;
- effect of early adoption on bank covenants;
- effect of adoption of the new 2019 revenue recognition standard;
- industry trends and investor preferences; and
- impact of interest rate differences on available adoption dates.
If you have questions or would like more information, please contact Ben McKinney at firstname.lastname@example.org or 844.4WINDES.