Understanding How the New Accounting Standards Impact Your Balance Sheet

Both the Financial Standards Accounting Board (FASB) and International Accounting Standards Board (IASB) have issued new standards for the accounting of lease obligations, beginning in late 2018 for some companies, or early 2019 for all others.

While that may seem like a long time off, the time to start preparing is now.

Many lessees will find that financial performance ratios and measures could be impacted. While there will be no impact to various P&L measurements under FASB, there will be additions to the balance sheet which will affect assets and liabilities and associated ratios. Under International Financial Reporting Standards (IFRS) from the IASB, ratios and measures related to both the income statement and balance sheet will be affected.

The table below provides a high level review of how the various ratios will be impacted by FASB and IFRS, and what this may mean for a lessee:

Impact to Lessee Ratios and Measures | FASB Topic 842 and IASB IFRS 16

  FASB Topic 842 IASB IFRS 16
  Impacted Not Impacted Impacted Not Impacted
Gross Margin   X   X
Operating Efficiency Ratio   X X  
Current Ratio X   X  
Quick Ratio X   X  
Net Worth   X   X
Liabilities to Net Worth X   X  
Debt/Equity Ratio*   X X  
Return on Assets X   X  
Return on Equity   X X  
*Assumes that lease liability classified as “other liability” will not be included in this calculation.

With a potentially significant accounting change looming on the horizon, now is the time for you to begin preparing how this impacts your leased vehicles. Key to this process will be for fleet managers to work closely with both internal and external finance and accounting groups for guidance and interpretation.

Strategic questions for your team to consider include:

  • Which standard applies to your company, FASB or IASB IFRS?
  • What data points are required for the calculations under the applicable standard?
  • What information do you currently possess – or lack – which would help in this process?
  • Will you choose to report retroactively, or flip a switch once the rules go into effect?

There could be significant changes in reporting requirements once a fleet’s operating leases are required to be recorded on the balance sheet. But, even with the changes in the pronouncement, leasing is still as good of a funding alternative, if not better, than in the past. Today’s interest rates are still at historically low levels. Other key advantages include:

  • Increased cash flow – frees up funds for investing in core business needs; low capital expenditure
  • Enhanced flexibility – a lessee has the opportunity to acquire new assets which might otherwise be unaffordable
  • Availability of an alternate funding source – leasing diversifies your portfolio and allows you to access new lines of funding
  • Enhanced planning – leasing typically provides a constant payment over the term thus streamlining the budgeting exercise

ARI continues to review the new FASB and IASB leasing standards in conjunction with both industry and professional service partners in order to determine the true impact of these standards for vehicle lessees. In the event that a lessee cannot take advantage of a short term lease option, we can assist in evaluating and addressing the potential impact to a lessee’s balance sheet and financial performance ratios.

These changes are being made with the investor in mind. The most astute already know how companies report leased assets, and now these new standards make it more apparent to everyone.