Preparing for Revenue Recognition and Lease Accounting Changes
Is your company prepared to implement the upcoming Revenue Recognition changes or the new Lease Accounting Standards?
We have prepared a memo to familiarize you with the guidance from the Financial Accounting Standards Board on the accounting and financial reporting changes relating to revenue and leases that are soon to be effective. The PDF memo can be downloaded here: Revenue Recognition and Lease Changes
We’ve also summarized some basic info about each change below:
The revenue recognition guidance is considered to be one of the most far-reaching and significant pieces of guidance issued by the FASB in recent years. Revenue is a critical financial measure for most entities and their owners, lenders and other stakeholders. For some entities, the accounting changes will be minimal and only new disclosures will be required. However, for other entities, significant accounting and reporting changes will be needed, in addition to the new disclosures.
Entities will need to evaluate the changes from current GAAP to the new revenue recognition standard and evaluate the impact on how your company accounts for existing revenue streams and the results to the company’s financial statements. In addition, it will be necessary to evaluate how the standard will affect operational and performance metrics, company contracts, compensation plans, accounting policies, internal controls, and tax matters.
This is effective for annual reporting periods beginning on or after December 15, 2018 (i.e. Calendar years ending December 31, 2019).
Legacy accounting GAAP requires lessees and lessors to classify their leases as either capital leases or operating leases and account for those leases differently. This legacy guidance has been criticized for failing to meet financial statement users’ needs because it does not always provide a faithful representation of leasing transactions. In particular, it does not require lessees to recognize assets and liabilities arising from operating leases. The core principle of the new lease guidance is that an entity should recognize assets and liabilities arising from a lease. A lessee will recognize a liability to make lease payments and a right-of-use asset representing its right to use the leased asset for the lease term. Entities will need to understand and evaluate how the standard will impact its financial statements, as well as operational and performance metrics including debt covenants.