Starting in January 2019, a new set of lease accounting standards will begin to take effect, requiring U.S. public companies to transfer an estimated $3 trillion of operating leases on to corporate balance sheets as right-of-use assets and corresponding lease liabilities. Historically, only a limited set of information about operating leases has been reported in the footnotes of SEC filings. However, under the new ASC 842 and IFRS 16 standards, companies will be required to add new line items to the balance sheet for these operating leases. As a result, key financial metrics, such as return on assets, asset turnover and the quick ratio will be impacted by these accounting changes.
Collectively, the top 1,000 public companies in the U.S. add up to $983 billion in operating lease liabilities. Although companies in every industry use leasing, there is a particularly high concentration of leases in the retail, airlines and telecommunications sectors. The retail industry will experience the greatest proportional balance sheet change from the new standards as specialty, grocery and food service chains tend to lease many of their brick and mortar store locations.
“With less than six months remaining until the initial deadlines for the new lease accounting standards, CFOs need to start developing strategies for communicating these balance sheet changes to their investor communities,” Michael Keeler, CEO of LeaseAccelerator, said. “We hope that this report will help companies understand and compare the level of impact they will experience from ASC 842 relative to their peer group.”
Developed over a period of 10 years by the Financial Accounting Standards Board (FASB) and International Accounting Standards Board (IASB), the new lease accounting standards change the way public companies will report leases in their quarterly and annual financial statements. Many real estate and equipment leases, previously only disclosed in the footnotes of investor filings, will now be capitalized on corporate balance sheets. The IASB estimates that more than $3 trillion of assets and liabilities will transfer onto corporate balance sheets in the coming years. The implementation deadlines for the new standards start in 2019.
The operating lease obligations and other figures used in the report were obtained from the financial and data analytics provider FactSet and corporate SEC filings.
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