Rock Products

JUN 2017

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36 • ROCK products • June 2017 www.rockproducts.com W ith the approval of new rules for lease accounting by the Financial Accounting Standards Board in 2016, lessees of construction equipment are considering how the new standard will affect them. Many of the lease account- ing changes are relatively neutral and should not impact the ability of compa- nies to acquire productive equipment to operate and grow their businesses. The primary reasons to lease equip- ment will remain intact under the new standard, which is known as Account- ing Standards Codification Topic 842 (ASC 842) and will generally take effect in 2019. One of the key changes is that leases previously classified as operating leases under current accounting stan- dards will now be capitalized and thus reported on corporate balance sheets. With the changes in balance sheet reporting, some financial statement ratios may be affected. Financial Statement Ratios A financial statement and its corre- sponding ratios are a key indicator of a company's financial health and are relied on by lenders and reviewed by potential investors, so it is important to under- stand any changes to financial statement ratios under the new standard. Under ASC 842, operating leases will no longer appear simply as a table of future payments in the footnotes; they will appear as a "right-of-use" asset and an offsetting lease liability on the balance LEASE ACCOUNTING Changes In Lease Accounting There Are Important Changes To Lessees' Financial Statements Under The New Lease Accounting Standard. By Ralph Petta sheet. We understand from credit agen- cies that the lease liability should be considered a non-debt type of liability; that is, an "other" operating liability. As a result, the return on assets (ROA) financial ratio is likely the only ratio that will change, although total liabili- ties will increase. Other financial ratios should remain unchanged. It is expected that there should be minimal impact on debt covenants and no impact on debt limit covenants. Overall, the new rules should have no impact on the profit and loss (P&L), or income statement because the lease-related costs should remain the same. To illustrate the changes in the key financial ratios, let's examine the dif- ference between leasing a $50,000 piece of equipment under the current standard, ASC 840 (formerly known as FAS 13), and the new standard, ASC 842. Looking at the methods for calculating typical financial ratios, you can see that some ratios are unchanged (blue side- ways arrows), while some decline (red downward arrow) and some increase (green upward arrow).

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