The FASB is updating requirements to include all leases to be reported on balance sheet, thereby, eliminating the distinction between operating leases and finance leases. The impact of this would include the following:
· Substantial new assets and liabilities on-balance sheet for `big-ticket’ items, such as aircraft, trains, vessels, real estate as well as equipment and computers leased under operating terms.
· Similarly, entities would need to recognize assets and liabilities in respect of numerous small leases, such as office equipment and auto fleets.
· Balance sheets would grow and leverage and capital ratios would change.
· The impact of change will not be restricted to external reporting; internal reporting information, including financial budgets and forecasts, will also be affected.
· More effort will be required to account for leases both initially and on an ongoing basis. Both lessees and lassoers would require initial and continuous reassessment of, estimates of the lease term, contingent rent, and other cash flows as facts and circumstances change and hence may require incremental effort and resources.
The proposed model may have broad impact on the tax treatment of leasing transactions, as tax accounting for leasing is often based on accounting principles. Given that there is no uniform leasing concept for tax purposes, the tax effect of the proposed lease accounting model will vary significantly, depending on the jurisdiction, in some jurisdictions IFRS principles and/or IFRS financial statements may be relevant for determining certain tax thresholds. Items that may be impacted include applicable depreciation rules, specific rules limiting the tax deductibility of interest existing transfer pricing agreements, sales/indirect taxes and existing leasing tax structures (in territory and cross border). A reassessment of existing and proposed leasing structures should be preformed to ensure continued tax benefits and management of tax risks. Even where tax does not follow the proposed model, management may see an increase in the challenges of managing and accounting for newly originated temporary differences in the financial statements. Timely assessment and management of the potential tax impact will help optimize the tax position, by enabling entities seek possible opportunities and/or reduce any tax exposure.
These upcoming changes will have far reaching effects and it is recommended that you contact your CPA and tax representative to assess your business exposure.