3 Major Things that Business Owners Need to know About FASB Before Signing a Long-Term Lease.
If you are a private business owner, you may have just learned about some recent changes made by the Financial Accounting Standards Board (FASB). Starting January 1, 2020, any lease that is longer than 12 months must be recorded on the lessee’s balance sheet. Given that this will impact how both assets and liabilities are reported, the results of this change may come as a surprise for business owners with long-term leases of three years or more.
Here are just a few things you need to know:
#3. Locations add complexity
If your business has multiple locations and leases, tracking these obligations may create a heavy burden for small or start-up companies. Getting an understanding of how this will impact you and your business early may lead to less headaches in the future.
#2. borrowing funds can get tricky
As a business owner, the ability to borrow funds is often critical for a company’s growth and/or expansion plans. With this new accounting standard, leases that were once recorded off of the balance sheet will now become front and center which may ultimately affect a firm’s ability to borrow money. Even “options to lease” that haven’t been realized can have an impact on the level of debt companies must report. As a result, in some cases, it may be more advantageous to own a commercial property versus paying rent.
#1. Long-term Leases must be reported
While it may not have mattered in the past, FASB now states that long-term leases must be reported on both the asset and liabilities side of the balance sheet. Even though you may not own the property you occupy for business, these new guidelines make tenants report this space as a valuable asset along with any other equipment and other tangible property that they use to do business. And with the addition of these assets comes the need to offset those as a liability on the balance sheet. For leases longer than 12-months, that means that the full value of that lease is recorded resulting in higher debt ratios than may have been reported in the past.
If you are in the process of renewing your lease or thinking of signing a new one, consider one that is shorter and will have as little impact to your bottom line as possible.
We’re helping to prepare our clients to be successful, despite these changes, by helping them take a look at the true value of their lease versus vs buy options. Before you sign a long-term lease, make sure you know how all of the numbers work out on your balance sheet. We’ve been helping clients weather every situation for 40 years. Reach out to one of our Indy team members if you’d like to have a conversation about your needs and how to move forward successfully.