Is Your Business's Financial Situation Complicated By Leases? What Should You Know About The New Lease Accounting Standards?

If you own a storefront business, it's likely that you are party to at least one lease agreement -- whether a lease of your retail space, equipment needed for manufacturing production, or even a vehicle used to transport clients. Determining depreciation schedules and liability reporting for these leased assets can be challenging, particularly for those businesses operating on a shoestring budget without the help of an outside accounting firm. However, the Financial Accounting Standards Board (FASB) has recently issued some new guidelines governing the reporting businesses must do if they lease items, equipment, or retail space used to help their businesses function. Read on to learn more about these changes and what you'll need to keep in mind when filing your business's next financial report.

What changes did the FASB make to lease accounting practices?

In February 2016, the FASB issued some guidelines to clarify the types of financial reporting required of businesses that lease assets. Prior to this clarification, businesses that held large quantities of leased assets were not required to recognize on their balance sheets any assets or liabilities associated with these leases unless they could be classified as capital or operating leases (rather than financial leases). This could make it difficult for lenders or potential investors to make a decision about investing in a business, as many weren't able to discern the full financial picture when off-sheet assets or liabilities were present.

Since February 2016, businesses that hold leases (capital or financial) for more than 12 months are required to report any assets or liabilities associated with these leases on their balance sheets. This can mean that if you lease your retail storefront and are required to make insurance payments, you'll have to report your insurance costs as a balance sheet liability associated with your lease. If you sublease a section of your store to another business, you'll have to report this sublease income as an asset.

How can these changes affect the way your business conducts its financial affairs?

In some ways, this change can make your job easier -- no longer are you required to discern between capital or financial leases for balance sheet purposes, as now both should be included. However, it can sometimes be challenging to decide which assets and liabilities are tied to which leased equipment. Before you fill out your next balance sheet, you may want to solicit the help of a certified public accountant (CPA) or other professional who specializes in business lease accounting and can show you exactly how these FASB changes will impact your daily routine.