Leases are an integral part of many businesses including their accounting systems.
(PRWEB) March 05, 2013
As the Financial Accounting Standards Board (FASB), along with the International Accounting Standards Board (IASB), prepare new accounting standards for equipment and property leasing, two top San Francisco Bay Area CPA firms have issued an explanatory blog post on the topic. The proposed leasing standard impacts many Bay Area businesses as it proposes one accounting model for all leases.
“Leases are an integral part of many businesses including their accounting systems,” commented Chun Wong, CPA, managing partner at Safe Harbor LLP. “Many San Francisco Bay Area businesses are concerned about any change to how leases are accounted for, as this can impact the accounting of current ratio, debt to equity ratio, asset turnover, and return on equity. Our goal is to help business clients understand the accounting impact of these proposed changes.”
For more information, go to:
New Lease Standards Impacting Bay Area Businesses - The Big Picture
Companies are used to entering into lease agreements and categorizing them as either capital or operating leases. Based on the type of lease, it is either put on the balance sheet and depreciated, or it is expensed as rent during the year. However, there is a proposed standard that will change lease accounting to a single accounting treatment.
The Financial Accounting Standards Board (FASB), along with the International Accounting Standards Board (IASB), have a joint project to make a common leasing standard. They cite that objective is to ensure consistent lease accounting across sectors and industries, in order to improve the quality and comparability of financial reporting.
The proposed standard has one accounting model for all leases:
- The balance sheet will have a “right-of-use” asset. The “right-of-use” asset is amortized on a straight-line basis over the life of the lease and amortization expense is recognized accordingly.
- The balance sheet will also have a liability for future payments. When cash is paid towards the lease, the lease liability decreases and a portion of the payment is booked to interest expense.
- The cash flows statement will classify all outflows as financing activities.
- The financial statements disclosures will explain the amounts recognized in the financial statements and the effects on cash flows.
Users of financial statements often calculate simple ratios to assess the financial condition of the company. The impact to financial statement ratios for this change in lease accounting may result in the following:
- Decrease in the Current Ratio
- Increase in Debt to Equity Ratio
- Decrease in Asset Turnover
- Decrease in Return on Equity
IRS Circular 230 Notice
The Internal Revenue Service requires Safe Harbor LLP to inform the reader that any tax advice contained in this correspondence cannot be used for the purpose of avoiding penalties under the Internal Revenue Code or for promoting, marketing or recommending to another party any transaction or matter addressed.
About Safe Harbor CPAs – a Professional CPA Firm in San Francisco
Safe Harbor LLP is a CPA firm that specializes in accounting and tax services for individuals and businesses throughout the San Francisco Bay Area and greater California. Safe Harbor CPAs helps both individuals and businesses with tax preparation, IRS audit defense, and audited financial statements. The firm prides itself on friendly yet professional service and utilizes state-of-the-art Internet technology to provide quality customer service.
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About G & J Seiberlich & Co LLP CPAs - a Professional CPA Firm in Napa, CA
G & J Seiberlich & Co LLP is the oldest full-service CPA firm in the North Bay and the first to specialize in many of the industries that make the region unique. Gordon Seiberlich came to the Napa Valley in 1949, determined to put his national accounting experience to work by establishing a full-service firm in a place that was scarcely more than a spot on a map.
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