We recently learned from Withum, CPA’s that the Financial Accounting Standards Board long anticipated new accounting rules for leases is now in effect for nonpublic companies whose fiscal year began after December 31, 2021. In simple terms, most every lease for lessees will no appear on a company’s balance sheet. The present value of all future minimum payments under a lease over one year in duration must be reported as a liability, with a corresponding offset to a newly created “right of use” asset.
Beware of your debt covenants!
With this new liability, debt covenants can be in jeopardy of noncompliance , despite the fact that nothing else has changed as fas as your business is concerned. Similar to historical capital vs operating lease classifications, leases will now be classified either as a financing lease or operating type lease. The expense recognition of each varies and can significantly impact your operating results.
It would be a good idea to get with your CPA about starting to account for this change soon so that there are no surprises at your fiscal year end!
Susan Reich
