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Securities Regulation and Corporate Governance > Posts > FASB Votes to Approve New Lease Accounting Standard and Plans to Issue the New Standard in Early 2016
FASB Votes to Approve New Lease Accounting Standard and Plans to Issue the New Standard in Early 2016

At a November 11, 2015 meeting, the Financial Accounting Standards Board (“FASB”) voted to proceed with final revised standards for lease accounting.  The new standards would require lessees to record certain assets and liabilities for all leases with a term in excess of 12 months.  This is a departure from existing accounting standards, which require balance sheet presentation only for leases classified as capital leases.  This change is anticipated to have a significant impact on balance sheets for a broad swath of companies, potentially resulting in recognition of material amounts of lease-related assets and liabilities for many companies.  Companies and their advisors should consider now whether the new standards will affect compliance with financial covenants in existing or future debt arrangements.

FASB’s vote is the result of an extensive review and comment process initiated after the staff of the Securities and Exchange Commission issued a report in 2005 indicating that FASB should reconsider the accounting treatment for leases.  FASB subsequently issued exposure drafts of revised lease accounting standards in 2010 and 2013.

The FASB indicated that it expects to publish the new standards in early 2016.  The standards will be applicable to public companies for fiscal years beginning after December 15, 2018 and to private companies for fiscal years beginning after December 15, 2019.  Companies may elect to adopt the final standard sooner.

Although public companies will not be required to comply with the new lease standards until fiscal 2019, companies and their advisors should consider whether existing or future debt arrangements will be affected by the new standards and, if so, what steps should be taken to condition creditors, investors and analysts about the impact of the changes.  In particular, companies with significant off-balance sheet leases under current standards may find that application of the new standard significantly increases their reported assets, liabilities, amortization expense and interest expense.  These reporting changes could affect a company’s ability to comply with financial covenants, including leverage ratios and income ratios, in their outstanding credit agreements and bond indentures.  In addition, both borrowers and lenders should carefully consider the effects of implementing the new standards when negotiating and entering into new debt arrangements.

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