5 Ways the New Lease Accounting Rules will Impact Transportation Companies

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The accounting for leases is changing significantly. Soon, nearly all leases will need to be disclosed as a liability on the balance sheet. Although the biggest impact will be on large entities, this will affect the financial statements of transportation companies leasing real property, equipment, vehicles, and other fixed assets as well.

5 ways the new lease rules may affect transportation companies

1. EXISTING LEASES WILL PRESENT DIFFERENTLY

Under the current rules, many leases are recorded only as rent expenses on a transportation company’s income statement. However, under the new rules, lessees will be required to record an asset and corresponding liability for substantially all leased property.  
 

2. EXISTING LEASES WILL BE INCORPORATED IN THE CHANGE

The terms of current leases are more than likely going to continue into 2021 and beyond, meaning every lease entered into is going to be presented differently on future financial statements.
 

3. CURRENT LOAN AGREEMENTS WILL BE AFFECTED BY THE CHANGE

Banking relationships are important to transportation companies. Agreeing to loan covenants now, without understanding how this standard is going to affect a transportation company’s financial statements, may put a strain on this relationship that could be avoided. 
 

4. BUY VERSUS LEASE DECISIONS ON EQUIPMENT COULD CHANGE

Many factors are involved when deciding between leasing a piece of equipment or purchasing the equipment outright. If showing debt on the balance sheet is a consideration, this will need to be re-evaluated to verify how the lease will be presented in the future.  
 

5. COMPARATIVE STATEMENTS NEED TO BE CALCULATED

The standard needs to be implemented for the earliest period presented, which will require calculations and a new presentation for all years presented. Transportation companies should determine if the bank requires comparative statements. The single-year presentation will remove a year of lease liability calculations and restatement, which may save time and money, but may reduce the usefulness of the statements.

The best way for your transportation company to prepare for the new lease accounting rules is to plan ahead. 

Below are three things your transportation company should be doing now to prepare:

1. IDENTIFY AND CLASSIFY LEASES

Review all existing lease and rental contracts and create an inventory list, including rent, interest rates, and security deposits. Lease documents will become a necessary item for accounting professionals, so start collecting and retaining these documents now.
 

2. EDUCATE TRANSPORTATION COMPANY’S BANKER

Educate investors about the new lease accounting rules and how they impact financial statements. Ensure they know what to expect in future financial statements. 
 

3. CONSIDER PURCHASING EQUIPMENT BEFORE THE END OF THE YEAR

If there are plans to enter into a new lease for equipment, consider purchasing it instead. Minnesota passed a bipartisan tax and bonding bill recently that included full conformity for all Section 179 expensing for tax years beginning in 2020. Additionally, the bill included retroactive Section 179 conformity to 2018 for assets acquired in a like-kind exchange.

Note: In an effort to alleviate stress for businesses during the pandemic, the Financial Accounting Standards Board delayed the effective dates of the revenue recognition and lease accounting standards. The effective date for the lease accounting standard will be for fiscal years beginning after December 15, 2021, and interim periods within fiscal years beginning after December 15, 2022.

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Implementation of new lease accounting rules may be a relatively simple process with the help of a CPA with expertise in your industry. Smith Schafer is a recognized leader in providing accounting, auditing, tax, and consulting services to the transportation industry since 1971. Our Transportation Group is committed to serving over 110 Minnesota transportation entities and stays on top of industry issues, trends, tools, and technologies to ensure we give you the best possible advice.

For additional details on the new lease accounting rules or to learn more about how we can help, please contact a Smith Schafer professional.

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