A change in accounting rules implemented by The Financial Accounting Standards Board (FASB) has led to FASB lease accounting changes. Furthermore, the proposed lease accounting changes will bring a large amount of debt onto the balance sheets of companies that have large operating lease commitments. Going forward, the lease commitment will be recognized as a liability. In addition, the offsetting asset will be a right-to-use for the material being leased.
An example of an operating lease would be where a company rents office space. Under the new FASB lease accounting changes, the future lease payment obligations will be on the balance sheet as a liability. The offsetting asset will be an equivalent “right-to-use” entry.
At the end of the contract, the capital lease has an option to purchase the leased asset. In accordance with the new FASB lease accounting rule, the capitalized lease is already required to be carried on a company’s balance sheet as a debt to lease holder and an asset entry for the item being leased. This ruling in effect makes all leases capital leases.
The effect of the FASB proposal on lease accounting could be enormous on industries that have large exposure to operating leases, such as real estate companies, etc. Also, a possible effect of the FASB lease accounting proposal would be where companies have to recognize leases on their balance sheet. That changes some loan covenants for debt ratios, etc. The changes became effective after the FASB decision in March 2011.