New lease accounting standards: How your logistics business can stay compliant
A wave of new leasing accounting standards is pushing companies to report millions of dollars in leases on their balance sheets—expenses that, under prior guidelines, were often left off balance sheets and reported as footnotes in corporate financial statements.
How do these standards impact supply-chain businesses?
These changes are affecting businesses in nearly every industry. But they’re making a particularly big splash in transportation, distribution and logistics, where companies often invest heavily in vehicles and other equipment through leases.
The changes are the result of ASC 842. Issued by the Financial Accounting Standards Board (FASB) in 2016 and put into effect during 2022, the new standards are designed to provide investors and lenders with greater transparency.
In the past, businesses weren’t required to include most leases on their balance sheets. However, while these contracts were classified as leases, many of them closely resembled purchases. Now, with ASC 842, businesses must classify virtually all leases as capital/finance leases, which must be reported on balance sheets with corresponding liabilities.
In practice, for supply-chain businesses, the new regulations increase compliance risks and make accounting for leases far more tedious.
4 tips for staying compliant
In light of the new accounting standards, let’s take a closer look at how your business can ensure compliance and avoid issues during your next audit.
#1: Develop clear, well-documented policies for identifying, classifying and extracting leases. For logistics companies, one of the biggest challenges for complying with ASC 842 is finding and extracting all leases that qualify as capital/finance leases. Leases are often scattered across numerous departments, which may or may not communicate regularly with one another, while some qualifying leases may be embedded in larger agreements.
To avoid missing or misclassifying leases, organizations should develop clear policies and procedures for identifying leases. Also, be sure to get stakeholders from across the organization in the room when developing these procedures to ensure company-wide buy-in.
#2: Keep an eye out for embedded leases. We mentioned this above, but we want to emphasize this point because embedded leases are so easy to miss or misclassify. While most leases are independent items, some may be embedded within larger agreements. You don’t want to miss these – auditors won’t – nor do you want to report a non-lease component on the balance sheet. Some common non-lease components may include insurance or maintenance expenses, which are not considered part of the lease and do not need to be reported accordingly.
#3: Document your key assumptions thoroughly. When identifying and classifying leases, you may make certain assumptions that affect whether they end up on your balance sheet. Auditors may ask for documentation of these assumptions, so you should always record them thoroughly and ensure you have evidence that your assumptions are reasonable.
#4: Partner with an outside financial management team to ensure compliance. ASC 842 makes it extremely difficult for most internal accounting teams to ensure compliance, especially when you consider that they have been following one set of rules for the past 40 years and are now expected to make a major shift.
At D+L, we have partnered with transportation, distribution and logistics businesses for nearly 50 years. We have a deep understanding of these new leasing regulations, as well as the many other challenges companies in this industry face. We’ll work directly with your management team to ensure compliance, as well as identifying cost-savings opportunities, strategic planning, and making real-time, data-driven decisions with confidence.
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