Corporates are gearing up to manage a whole slew of accounting standards changes in the coming years, but one of the more immediate effects involves how leases are recorded on financial statements. Reports in The Wall Street Journal said the changes could “upend” loan agreements, and have chief financial officers scrambling to adjust their strategies.
As the publication reported Thursday (Oct. 11), public companies will be required to report their operating leases as liabilities, which will significantly change their corporate debt-to-earnings ratios. It’s a key metric for lenders when establishing loan covenants to mitigate default risk, and could limit borrowing powers even for a company whose financials have not changed.
The changes take effect next year. Until then, CFOs are either renegotiating their loan agreements or developing specialized financial reports for their lenders, reports said.
“There will be legal fees and bank fees and all kinds of things” as a result of the changes, said one CFO, Steven Michaels at furniture retailer Aaron’s Inc. The company recently disclosed loan complications as a result of the changing standards, but reports said more companies are expected to do the same.
“Many companies aren’t far enough along in implementing the new standards to even know whether their debts will be affected,” the publication warned.
According to reports, public companies currently hold an estimated $3.3 trillion in leases. Historically, their leases were recorded in footnotes of financial statements, but the changes will pull that data front-and-center as regulators push for greater corporate transparency.
In addition to loan challenges, corporates are struggling with investing in new databases to record and manage data on their existing leases, updating accounting software, and training their staff to remain compliant with the new standards. Some companies may seek legal advice on adopting the new standards or interpreting loan covenants. Reports also said that there may be no financial benefit to the changes.
“It creates extra work for already lean financial reporting groups,” said PricewaterhouseCoopers (PwC) partner Sheri Wyatt in another interview with the publication.