New Lease Accounting – Not a big deal for Wheels clients
By Dan Belknap March 31, 2021
New Lease Accounting – Not a big deal for Wheels clients!
It’s been more than a year since the Financial Accounting Standards Board announced that new lease accounting rules will be required for all public companies beginning in 2019. Since then many clients have asked how the new rules will affect them, and what they need to do to prepare. Our answer; we are here to help and the impact on many Wheels clients will be minimal.
Under today’s accounting rules, lessees do not show operating leases on their balance sheets. Under the new rules, companies that lease large, long-term assets like real estate, aircraft, and specialized equipment will need to show those leased assets and related payment liabilities on their balance sheets.
While it might seem that leased vehicles fall into that category, the new accounting standards include a simplified treatment for short term leases where ending or renewing the lease does not have significant economic consequences to the lessee. These leases will be treated similar to current accounting, with disclosure only. Wheels leases will fall into this category.
Why the rule change?
In 2002 congress passed the Sarbanes Oxley Act (SOX) to protect investors through greater transparency about accounting activities by the corporations they invested in. One item the Act focused on was lease accounting.
The Financial Accounting Standards Board that writes the accounting standards studied lease accounting for over a decade and issued a number of draft standards to obtain feedback from companies, investors, regulators, and accountants. The final standard is intended to be a simple, practical approach that improves transparency for leases.
The Board intended that many, but not all, lease arrangements be reflected on lessee balance sheets. The amounts shown on balance sheets will be based on the minimum lease payments plus certain renewal options. Leases of large and specialized assets (including a minority of fleets) that are meant to have long use periods with significant rental payments and will go on companies’ balance sheets.
More on Wheels lease
Wheels lease is designed to provide the ultimate flexibility on a month-to-month basis to clients. It is a short term lease (12 months or less) and can be extended or terminated at any time after 12 months. Clients often choose to extend our lease beyond 12 months based on business needs and convenience. However we often see leases ended at 12 months, when vehicles are no longer needed. There are no penalties for extending or ending our lease. Since our clients have great flexibility, the options to extend the lease will generally not be counted in the minimum lease payments. So, most Wheels leases will qualify for the simplified treatment that is similar to current accounting with disclosure only.
For questions about the new lease accounting rules, please contact your Wheels support team or e-mail me at firstname.lastname@example.org