New in 2019 is an accounting rule change regarding how leases are recorded on your financial statements. This is especially relevant if you are required (i.e., as a condition of a bank loan) to prepare your financial statements according to GAAP (generally accepted accounting principles). While these statements are typically prepared by an outside accounting firm, knowing about this change can help you prepare and make the process of compiling the financial statements easier for everyone involved.
Up until 2019, leases and equipment rentals (including some service contracts) were recorded when incurred as expenses on the statement of activities. Effective December 15, 2019, these arrangements are required to be listed on the balance sheet as “right-of-use” assets, along with a corresponding lease liability. The amortization of both the asset and the liability require calculations that are complex.
This change will also impact your loan covenant calculations (i.e., debt ratios) and certain financial metrics that banks use to approve loans. Be sure to begin gathering all service and lease agreements now. If you need help in properly recording the leases or ascertaining the impact on your organization, please contact your accountant.