There may be a variety of leases you depend on to run your business in Nashville. Office space is the least of it; you may also be leasing a vehicle, piece of equipment, furniture, or another type of asset.
If you plan on entering more leases in the foreseeable future, check in soon with your trusted accounting firm. A new regulation on leasehold accounting, IFRS 16, will take effect in January 2019. It can potentially impact your business in the long run and day to day.
What is this new regulation?
To date, companies must classify their leases either as finance or operating. In a finance lease, the asset remains owned by the lessor throughout the lease period (as with anything rented). In an operating lease, the asset could be eventually transferred to the lessee (as with a loan). As such, operating leases are counted simply as expenses, while finance leases can be considered assets or liabilities—items that must be listed in a balance sheet.
Starting in 2019, there will no longer be such a distinction: all leases will be recorded in the balance sheet. According to the IFRS regulatory board, this is to ensure that financial information reported “faithfully represents lease transactions and provides a basis for users of financial statements to assess the amount, timing and uncertainty of cash flows arising from leases.”
How can it affect my business?
Imagine suddenly having your assets and liabilities surge because you have to record more of them. How would that look on your financial statements? And how would that look to creditors, investors, and other parties who assess the health of your company?
Depending on how IFRS 16 impacts your financial statements, you might want to reassess the leases you enter. Perhaps shorter-term agreements will balance out the numbers and put you in a more favorable light. Perhaps ownership will become a more viable option, in which case you would need to reconfigure how else to manage your finances.
On a micro level, the new regulation can require you to improve bookkeeping surrounding your leases. You might need to upgrade tracking systems and software so you can document further details for every single lease.
What can I do to prepare for it?
There are many more nuances to the new regulation, which are detailed in this document. The best thing to do is consult your CPA on what these mean and what you should do about them.
Evan Hutcheson, CPA, LLC can review all potential impact with you, and advise you on accounting strategies for 2019 and beyond. Contact him or visit his accounting firm in Nashville to discuss your concerns in person.
Sources:
Changes to leasehold accounting standards in 2019, US-EN.WorkUnitedStates.Regus.com
IFRS 16: About, IFRS.org
IFRS 16: The leases standard is changing. Are you ready?, PWC.com
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