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Get Ready for New Leasing Rules

FASB and IFRS changes will cause challenges for companies with fragmented information on equipment leases. Heres how to prepare.

By Michael Keeler | Updated on March 03, 2016
FASB IASB equipment leasing new rulesThey might not admit it, but if you were to ask treasurers and controllers of public companies how many leases their organization has, most of them likely wouldn’t know. If you then asked how they generate their future payment obligations in their notes disclosures, they would probably change the subject.

Until now, corporate finance executives haven’t felt a burning need to manage their equipment lease portfolio—in part because the current lease accounting standard treats operating leases as expenses that have to be reported only in financial statement footnotes. Accountants and auditors alike have focused on higher-risk compliance items. With limited time and resources, controllers and audit committees are always prioritizing, and leasing has usually not made the cut. That’s about to change.

On January 13, the International Accounting Standards Board (IASB) launched IFRS 16 to replace IAS 17, and on February 25, the Financial Accounting Standards Board (FASB) announced ASC 842 to replace ASC 840 (formerly FAS 13). Under the new rules, lessees will account for a lease contract’s rights and obligations as an asset and liability, calculated as the present value of the lease payments. Both new standards require that all leases longer than 12 months be capitalized, moving them from the footnotes to the balance sheet, and they share an expanded definition of a “lease.” Beyond these similarities, the two standards diverge.

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