The implementation of ASC 842 and IFRS 16 has had a significant impact on the way that companies account for leases. Achieving compliance with these standards is essential for companies to accurately report their financial information. These new lease accounting standards may also have a notable impact on lease negotiations. As a CFO, Controller or CPA, it’s important to understand the best practices and lease accounting systems that companies can adopt to ensure compliance with these standards.
- Increased scrutiny of lease terms – under the new standards, companies must evaluate leases for their economic substance. This requirement may cause companies to take a closer look at the lease terms they are negotiating, leading to a more critical evaluation of the terms and impact on accounting requirements.
- More complex lease structures – the new lease accounting standards require companies to record more information about leases on their balance sheet as a Right-of-Use Asset and Right-of-Use Liability. This may lead to more complex lease structures and more inter-company transactions as companies may need to use more sophisticated lease accounting systems and legal structures to achieve the desired accounting treatment.
- Impact of changing interest rates in discount rates – the discount rate used to value lease obligations is a key component in determining the amount of the liability that must be recognized on the balance sheet. An increase in global interest rates will likely result in companies needing to increase their discount rates to value their lease obligations, which could have several impacts such as changing the present value of lease obligations. It could also impact the company’s debt-to-equity ratios.
- Increased use of lease versus buy analysis – the new lease accounting standards may cause companies to be more inclined to consider the lease versus buy analysis for acquiring new assets. This analysis may impact the negotiation process, as companies may be more willing to negotiate purchase options and other provisions related to the lease versus buy analysis.
- More transparency and visibility – the new lease accounting standards require more transparency and visibility into lease arrangements. This may lead to more open and collaborative negotiations, with both parties working together to understanding the impact on lease accounting.
It is critical for companies to understand these potential implications of the new lease accounting standards, as they may impact the way that companies negotiate and account for leases.
These new lease accounting standards may lead to increased scrutiny of lease terms, more complex lease structures, increased use of lease versus buy analysis, and more transparency and visibility into lease arrangements. All requiring a more robust lease accounting system.
Understanding these potential implications can help CFOs, Controllers and all CPAs provide better guidance to their stakeholders and navigate the new lease accounting standards with confidence.