What You Need to Know About the New Leasing Standard

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Big changes are coming your way and implementation is now imminent with regard to the new leasing standard.  You may be asking yourself, “Does this really affect me?” Part of that answer may be to schedule a conversation with your accountant, but there are some quick considerations you can contemplate to determine how you may want to start that conversation. (Scroll over images to see the considerations.)

Definition of a Lease

A contract that conveys control of the right to use another entity’s non-financial asset, as specified in the contract, for a period of time in exchange for consideration.

Bottom Line Effect

All leases will need to be evaluated such as copier leases, vehicle leases, building leases (rent), equipment leases. A liability and offsetting right of use asset or deferred outflow of resources (for our governmental clients) will be presented on your Balance Sheet. Historically, operating leases have been reflected as a current year expense. Now you see some of them on your Balance Sheet to show the rights you have to the use of that asset.

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Copier Leases
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Vehicle Leases
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Building Leases
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Equipment Leases

With certain clauses, there may be leases that are exempt, but you will need to closely consider those exceptions with your accountant. We also need to consider instances in which your Organization is the lessor.  There is updated accounting treatment for the lessor as well.

What You Can Do NOW to Expedite this Process

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Gather

Gather ALL your leases together for discussion and review with your CPA.
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Consider

Consider all contracts and determine if there are lease components in other operating contracts.

Note: for governmental entities ascribing to GASB, supply contracts such as gas contracts are not subject to the leasing standard and will be treated as they have in the past.
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Note

Dig into the details of your leases & contracts to note:

Terms of the lease

Rent amounts and payment schedules (monthly, quarterly, annually)

Purchase options

Other elements in leases such as service agreements

Why this Matters for You

If you have debt covenants, you will need to discuss the presentation with your banker prior to issuing your 2022 financials. You want to make sure your banker and other interested parties know that you are going to have changes to your financials before they see them after year end. Avizo can show you what your financials will potentially look like, by running calculations on your 2021 leases to ensure you have information in which to have a conversation with your banker or other interested parties. We can attend those meetings (in-person or virtually) with you so that we do the explaining for you.

Also, in the past just as we have maintained depreciation schedules for many of our clients, we now have lease accounting tools in which we can maintain your leases and the respective terms to help you better manage the accounting with regard to this standard.

When Do We Need to Talk?

NOW! This standard is in effect for fiscal years beginning after December 15, 2021.  If you operate on a calendar year end, you will need to implement the standard for calendar year 2022’s financial statements. Whether your Organization is a small business, non-profit organization, or governmental entity, there is implication here for all entities, so email us as soon as possible to get a meeting set up.

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LeeAnn M. May, CPA

A shareholder & strategic consultant of the firm, LeeAnn is an audit & assurance guru with a special love for governmental & nonprofit entities.

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