Lease Accounting for Manufacturing Companies

In 2016, the Financial Accounting Standards Board (FASB) issued new guidelines for the way businesses of all sizes and industry types handle lease accounting to increase transparency and disclosure of lease transactions.

The new accounting standard update, ASU 2016-02, Leases (Topic 842), (ASU) affects any businesses that lease assets. As leasing is critical to success in the manufacturing industry, the ASU may have a significant impact on your financial statements. 

For nonpublic companies, the standard currently takes effect for years beginning after December 15, 2019, and December 15, 2020, for interim periods. However, the FASB has proposed to extend the implementation date to years beginning after December 15, 2020. 

What should you do? The time for a plan of action is now.

  1. Take an inventory of the leases you have.

The good news is, this is already part of the financial statement process in compliance with U.S. GAAP.

  1. Categorize leases by term, less than one year or greater than one year.

Until now, categorization was based on whether the lease was an operating or capital lease. The ASU changes how a business reports leases within their financial statements. Both operating (if greater than 12 months) and capital leases must be reported on the balance sheet as a right-of-use asset. Currently, only capital leases are reported on the balance sheet. However, leases with a term of less than one year will continue being reported as operating leases.

  1. Determine if you need a third party to calculate the values, or if you can do it internally.

The ASU on lease accounting can be a complex adoption. Whether you’re a large manufacturer with an accounting department or a small business outsourcing accounting services, assess the level of assistance you need in categorization and calculating the lease asset and liability.

  1. Create a plan.

Know where you fall among the ASU’s effective dates. Gather data and determine the appropriate method of adoption for your business. 

Every manufacturing company faces challenges that won’t have one-size-fits-all solutions. Seek professional assistance in making a plan and guidance for successfully navigating the changeover and future compliance.  

The professionals at Albin, Randall & Bennett are manufacturing industry leaders here to help you through a smooth transition to the new lease accounting standards, as well as other accounting and attest services. Contact us today to discuss your strategy for lease accounting compliance.

 

by Holly Ferguson