At long last, the Federal Accounting Standards Board (FASB) is ready to pull the trigger on its new standard for lease accounting. Under the new rule, long-term operating leases—including equipment and other assets—will appear on the balance sheet for the first time as non-debt liabilities. The expected implementation date is 2019, but many companies will probably need to start keeping two sets of books next year, if not this year, in order to be ready.
But many finance chiefs at small and mid-sized companies aren’t feeling all the comfortable about how to start. CFO Research, in collaboration with financing firm CIT Group, surveyed finance executives at companies with revenues of between $25 million and $1 billion. As documented in our subsequent report, Impacts of a New Lease Accounting Standard for the Mid-Sized Business, 43% of respondents said they were still fuzzy on what the new standard would mean for them.
Their worries go beyond just the mechanics—and costs—of redoing their financial statements. Many had questions about how the accounting change might affect their reporting of liabilities, and consequently financial metrics such as ROA, debt-to-equity, and cash flow. Others even foresaw constraints on their companies’ growth. The head of finance for a company in the retail/wholesale sector wrote in the survey, “The cost, both monetarily as well as structurally, of renegotiating our banking covenants to accommodate this standard will likely be significant enough to slow our forward momentum.”
It’s never too early to get a jump on mitigating these kinds of concerns. Our report concludes with five key questions that finance executives can ask themselves in preparation:
- What are the key metrics underlying your financing decisions? How will the accounting change affect those factors?
- Will your company need to trade off operational and strategic benefits of leasing with the cost of implementing the accounting change?
- How ready is your company to act when it needs to? Do you have a good idea of how much time and effort if will take your company to adapt to the new standard?
- Do those responsible for setting the direction for your company—your C-Suite, board, owners and shareholders—understand what will change for your business, and what won’t?
- What can you and your finance team do now to prepare yourselves, and others in your company, for making the transition with the least disruption to your business?