The new lease accounting standards were under development for a period of 10 years. A joint project between FASB and IASB, multiple exposure drafts were issued with extensive public comments. Before FASB’s ASU 2016-02 and IFRS 16, lease accounting rules had not been updated in 40 years. The original rationale behind the standards was to protect everyday investors from potentially misleading financial statements.
Top Business Risks
With these new assets and liabilities, financial metrics such as return on assets, EBITDA, and operating leverage could change significantly for some companies. How will shareholders, bondholders, lenders, and credit rating agencies respond to these changes? Will these new liabilities on the balance sheet impact corporations’ ability to borrow money or their existing debt covenants? Will these accounting changes impact market capitalization or stock price?
Financial Statement Impacts
With the introduction of the new lease accounting standards, several trillion dollars worth of assets and liabilities will transfer onto corporate balance sheets over the coming years. How will those new assets and liabilities impact the financial metrics that institutional and retail investors use to evaluate the financial performance of publicly traded companies? How will these new accounting rules impact asset turnover, return on assets, and quick ratio?
Understanding the Challenges with Implementing the New Lease Accounting Standards
Listed companies using IFRS Standards or US GAAP are estimated to have around US$3.3 trillion of lease commitments; over 85 per cent of which do not appear on their balance sheets.International Accounting Standards Board
Our research shows that the average company will see a 13% increase in EBITDA and a 22% increase in interest-bearing debt...the average expected increases for retail business are 41% and 98% respectively.James Chalmers, PwC’s UK assurance leader
These new accounting requirements bring lease accounting into the 21st century, ending the guesswork involved when calculating a company’s often-substantial lease obligations.Hans Hoogervorst, IASB Chairman
Research Studies – Is the Market Ready?
Since the publication of the new lease accounting standards in early 2016, there have been a number of excellent recent studies conducted by Big Four firms such as KPMG, real estate brokers such as CBRE, and industry associations such as FERF. These research studies attempt to quantify the composition of corporate leasing portfolios as well as the lease accounting business impacts expected by chief financial officers and chief accounting officers.
Fortune 500 – Who is Most Impacted?
According to the International Accounting Standards Board (IASB), listed companies are estimated to have around $3.3 trillion of leasing commitments, over 85 percent of which are off balance sheet. Leasing obligations for a specific company can range from a few million dollars (on the low end) to tens of billions of dollars (on the high end). For example, Walgreens and AT&T each have over $30 billion in operating leasing obligations, while Hershey and Harley Davidson each have only a little more than $50 million in operating leases.