All accounting procedures and transactions that take place in business will be regulated by accounting standards. This is less of a problem for businesses that use accounting software to take care of this side. In particular, when they are involved with leasing agreements which can be complex. To work out which piece of accounting software might help your leasing business, you might like to try a demo of LeaseAccelerator.
During this article, we will talk about how important accounting standards are to leasing, which software can help take care of.
Which Accounting Standard Will Define a Lease?
The new FASB accounting standard ASC 842 for leasing was introduced to replace the current guidance of ASC 840. This was with effect from December 15 in 2018. At that time, it was only a requirement for public companies. Since the same date in December of 2020, though, it would become necessary for private companies too. They were given extra time to comply.
ASC 842 is the accounting standard that defines what a lease is in accounting terms. The definition will define a lease as being an asset that another will gain the rights to for a specified period in exchange for money. Legally, money is termed “consideration.” There will be many legal terms used in the accounting standards of leases that businesses should become familiar with.
What are IFRS 16 and GASB 87?
The IFRS part of IFRS 16 stands for International Finance Reporting Standard. The International aspect means that there is no avoiding compliance in lots of places where leasing happens.
IFRS 16, issued in January of 2016, became effective for most companies that previously reported under IFRS.
The purpose of IFRS 16 is to report the kinds of information that will faithfully represent lease transactions. It gives access to the basics of leasing on financial statements in respect of leasing amounts and timings. It provides managers and investors in a company with a greater understanding of when there might be cash flow problems because of leases. It removes this uncertainty of not knowing when they might occur.
GASB 87 is intended to exist alongside the ASC 842 and IFRS 16 accounting standards. It defines the control another must use a nonfinancial asset in terms of the period of financial exchange.
Why are Leasing Accounting Standards Important?
To answer the question of why lease accounting standards are important is to answer in the main why any accounting standard is important, then to refer you to the three lease accounting standards mentioned above in terms of what their purpose is for those needing to know about the accounts of leasing companies.
The main purpose of accounting standards is to ensure that financial statements from the different companies are comparable. We should, as an investor or business owner looking to see how we are performing compares to our competitors, gain a like-for-like impression of finances. For this to be possible the different entities all must follow the same set of accounting rules. In other words, accounting standards. These will determine how financial statements are laid out. The information with its greater accuracy and transparency will allow for economic decisions that are made based on more accurate and consistent information.
It is important to keep up-to-date with lease accounting technology. This can only make it easier to comply with accounting standards new and old.
Looking at the above, we can then see why accounting standards are so important with lease accounting as with other forms of accounting. They are about regulation and transparency and anyone looking at a set of accounts knowing what is going on with one business compared to another. This is whether they are a business owner, accounts manager, or an investor. There will be a reluctance for an investor to put their money into a leasing business if they are not clear on the timings of leases. This should no longer be the case, though, with the latest accounting standards. All we need to do is take note of them and make use of the lease accounting software that is available to help us.