Earlier this year, companies are required to record operating leases, such as equipment, office space, planes, and cars. It’s estimated that this new rule will pull up to $3 trillion into the spotlight, expenses that were previously often buried in footnotes rather than recorded on balance sheets.
Up to this point, companies were only mandated to record leases that led to the purchase of the asset. The Financial Accounting Standards Board has enacted this change to make it easier for investors to evaluate companies’ financial obligations.
According to the International Accounting Standards Board, U.S. public companies are committed to $3 trillion in operating leases. Companies with the largest amount of operating leases include restaurants and retailers.
Leverage, which is measured in the ratio of debt to earnings or debt to equity, is fundamental to evaluating a company’s risk. This accounting rule change may force investors to alter the way they assess criteria to make investment decisions.
MSCI Quality index employs debt to equity as one of the major metrics in ranking companies, and if a company’s debt to equity ratio changes significantly as a result of this new accounting rule, it could get screened out of the index. In spite of that, Kevyn Dillow, accounting analyst at Moody’s Investors Service, clarifies that credit quality is not changing as a result of this new rule.
Adding another layer of complexity: some data vendors have yet to incorporate lease liabilities into a company’s total debt amount, and some don’t plan on it even in the future. This means that different platforms could ultimately run very different numbers, leading to inconsistencies in data metrics, which is a concern for many.
Flexi
Accounting rules change often, and Flexi knows you need software that keeps up. Whatever industry you work in–whether it be financial services, healthcare, insurance, or banking–Flexi can help keep you on top of the most current regulatory measures.,
Flexi’s powerful accounting software was built to simplify the complex processes that accountants face every day. Flexi understand how stressful the period close is, how complicated multi-entity books can be, and how frustrating audits are when accurate reporting is not easily available.
A laser focus on finance and accounting software has enabled the Flexi team to scrutinize every step of the accounting process, and develop a solution designed to simplify every task. This “process-driven” approach delivers tremendous benefits to finance teams, including a faster, more accurate financial close.
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