Any business that leases anything for an extended period of time — generally, more than one year — will be impacted by a proposed new accounting standard. “This may appear arcane to some, but the new rules will have a major impact on the reported financial position of many companies. It has been estimated that this may add hundreds of billions of dollars to the existing liabilities on businesses’ balance sheets nationwide,” says Gerald Weinstein, Ph.D., CPA, a professor and chair of the Department of Accountancy at the John Carroll University John and Mary Jo Boler School of Business. “Therefore, it is likely that your firm’s financial statements will be affected. At a minimum, expect to see changes in the ways in which leases are being conceived of for recognition and measurement purposes,” says Weinstein.
Under the new standard, what defines a lease as a capital lease is changing under an exposure draft (ED) issued jointly by the Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB) on May 16, 2013, and the four indicators noted above will no longer apply. Everyone will be affected if this becomes a final standard in 2014.
Companies should determine which leases they have that will now need to be capitalized, prepare pro forma financials, and determine the impact your solvency ratios. If the new accounting rules cause your debt ratios to deteriorate, consider contacting your lending institution to see if you can re-negotiate the covenants, says Weinstein.
Keeping up with changes that could affect your company’s bottom line is one reason to work closely with an accountant throughout the year. An accountant can serve many types of roles for CEOs, from hands-off keeper of the books to proactive, fully engaged adviser. It’s up to executives to decide how heavily they want to rely on their accountants. But in general, the more interaction they have, the fewer financial surprises they’ll run into.
There are many business situations for which accountants, if they’re consulted ahead of time, can provide valuable advice, says Jim Forbes, tax principal with Skoda Minotti. These include buying fixed assets, making investments, timing the recognition of income, compliance with loan covenants, and monitoring pricing, material costs and margins.
“For most of our clients, we try to be involved on a regular basis, at least quarterly, because we can give them options — maybe it’s a way to reduce taxes or to run their business more efficiently,” Forbes says.
“If you want to derive the most benefit, you have to work with your accountants year-round,” says Steve Christian, managing director at Kreischer Miller. “If you just want a scorekeeper who prepares a financial statement and a tax return and don’t want to include him in your team of advisers, you certainly don’t need to. But most progressively minded companies try to surround themselves with good advisers. And the way you become a good adviser is to intimately know the company you’re advising and spend as much time with them as you can, 365 days a year.”
Learn about the changes impacting the definition of a capital lease and how your company can prepare by reading the full article from Gerald Weinstein, Ph.D., CPA, professor and chair of the Department of Accountancy at the John Carroll University John and Mary Jo Boler School of Business at http://www.sbnonline.com/2013/08/changes-to-lease-accounting-are-coming-are-you-ready/?full=1.
More from Jim Forbes, a tax principal at Skoda Minotti, is available at http://www.sbnonline.com/2012/05/jim-forbes-special-report-on-accounting. You can read more from Steve Christian, managing director at Kreischer Miller, at
Date posted: August 26, 2013