Originally published in NEFA Newsline
By Nancy A. Geary
At long last, the Financial Accounting Standards Board (FASB) has issued finalized changes to lease accounting with Accounting Standards Update (ASU) 2016-02. The updated standards take effect in fiscal years beginning after December 15, 2018, for public companies and fiscal years beginning after December 15, 2019, for private companies.
With these long awaited changes finalized, and effective dates released, leasing company accountants are now hard at work reviewing and interpreting the new rules, assessing data and software needs, and developing implementation strategies. Of course, it is important to have access to adequate training to be able to move your company in the right direction with regard to the changes.
With the amount of planning currently going on in your accounting department related to this topic, you may feel secure that you have the matter well in hand and your job is done. But what about the rest of your company? Have you considered how the changes will impact other areas of your operation?
The lease accounting changes affect both lessors and lessees. Successful lessors will not only address the impact to their accounting, but they will also give careful consideration to how the changes impact the lessee and how that will affect the leasing company’s business, not only from an accounting perspective, but from the sales, marketing and credit perspectives as well.
A Knowledgeable Sales Team
Before an application reaches your office, a potential lessee’s first exposure to your company is normally through your sales staff. We all know that a smart sales person will ultimately refer the potential lessee to their own tax advisor for a final assessment of their lease transaction. However, we also realize that a sales person who is knowledgeable regarding the accounting and tax impact each lease option your company is offering will have on the lessee, can be very effective in selling a transaction. Many lessees look to the salesperson to offer his/her opinion or advice regarding the transaction’s financial statement presentation and tax return treatment, well in advance of the time they involve their own accountant or financial advisor. How are you planning to make sure your sales team is familiar enough with the new rules to be helpful to potential lessees?
Additionally, your sales team needs to understand how the lease accounting changes are affecting your own business, and what changes or additions, if any, you will want or need to make to the menu of financial products you currently offer potential lessees. If your sales team doesn’t understand what changes are being made, or their impact on a lessee’s business, how will they be effective in selling your products?
Credit: A Step Ahead
On the lessee side, virtually every company renting their office space will now need to record a lease liability and an associated right to use asset on their balance sheet. This is also true if they currently hold machinery or other equipment on operating leases that were previously considered “off balance sheet” assets. A longterm office lease or large machine held on an operating lease may result in a large liability and the related asset being added to the lessee’s balance sheet. While their actual obligation has not changed from one day to the next, complying with the new financial standard may change their financial ratios significantly. When your credit team reviews financial statements with this liability, will they understand what it is, why it is there and whether they should adjust their credit criteria in light of these new balances? Will they know how to evaluate whether or not a lessee is complying with the new standard? What training will you offer your credit team to make sure they are ready to interpret these financial statement changes?
Companies providing their credit teams with the right tools to interpret financial statements incorporating the lease accounting changes, and helping them properly assess the effects these changes will have on their credit criteria, will be positioning themselves a step ahead of the curve. If a banker or funding source is not up to the task of interpreting the change in financial presentation and its effect on financial ratios, their lack of familiarity could result in them turning down financing requests from credit-worthy businesses. Your well-educated credit team, armed with all of the tools needed to properly evaluate and interpret lessee financial statements, will be prepared to make well informed credit decisions and not bypass creditworthy businesses.
Since your sales team likely performs an initial credit assessment and may even quote rates based on their initial assessment, they should be included in this financial statement assessment training as well.
Publicizing Your Expertise
In addition to your sales and credit teams, have you considered how a basic knowledge of the changes affecting lessees could be useful for your marketing team? It would be great to publicize the fact that your company is knowledgeable with regard to the accounting changes and how they affect a lessee’s balance sheet and financial ratios. Targeted marketing geared toward companies having trouble getting their current banker or funding source to recognize that this change in their financial ratios does not truly change their creditworthiness may be quite successful. Will you be developing or changing any of your current product offerings? This may require an update to fact sheets or other sales tools. While your marketing team does not need to develop an in-depth understanding of the accounting changes, providing them with the basic information needed to develop new sales and marketing tools can be a very productive use of your resources.
While it is important for your accounting team to be knowledgeable regarding the upcoming lease accounting changes, it is clear that the flow of information cannot stop there. Sharing relevant information with sales and marketing staff, as well as the company’s credit team, is also necessary. Lessors who work with brokers need to make sure their brokers are properly informed. Does your company have vendor programs? If so, those folks are your first line of contact with potential lessees. How important is it to your operation to have these business sources knowledgeable of a lessee’s new financial reporting requirements? Are there others in your organization who would benefit from a little education on the new accounting standard?
My advice to all leasing related organizations, no matter the size, is to start assessing your organization, and, if you haven’t already, identify all individuals who would benefit by understanding the upcoming new accounting standard. Assess the level of education that would be appropriate for each individual or group of individuals, and then come up with a company-wide education initiative. Being ahead of the curve will surely benefit your organization.
Nancy A. Geary, CPA, CLFP is a Shareholder at ECS Financial Services, Inc.