Adapting to Lease Accounting Changes: Navigating GASB 87 and FASB 842

Lease accounting is undergoing significant changes with the introduction of GASB 87 and FASB 842, affecting how organizations report leases on their financial statements. These new standards require nearly all leases to be recognized on the balance sheet, shifting away from the previous practice of keeping some leases off-balance sheet.

Understanding the Changes

• GASB 87: Applicable to government entities, this standard mandates the recognition of lease assets and liabilities on the balance sheet, with few exceptions like short-term leases.
• FASB 842: For private sector companies, this standard also requires most leases to be recorded as assets and liabilities, differentiating between finance and operating leases.

Operational Adjustments

Organizations must adjust their systems, processes, and training to comply with the new standards:

• System Upgrades: Update accounting systems to track lease data accurately.
• Data Management: Implement processes for comprehensive lease data collection and management.
• Training: Ensure staff are well-trained on the new standards to avoid compliance issues.

Strategic Considerations

Beyond compliance, these standards prompt a reevaluation of leasing strategies:

• Lease vs. Buy: With leases now on the balance sheet, organizations may reconsider whether to lease or purchase assets.
• Financial Ratios: The changes may impact key financial ratios, affecting loan covenants and investor relations.
• Transition Planning: A clear plan is essential for smoothly implementing the new standards.

Long-Term Impact

While the new standards present challenges, they also enhance financial transparency and comparability. Organisations that proactively adapt to GASB 87 and FASB 842 can improve their financial reporting and make more informed leasing decisions.