August 17, 2021
Most farming operations I work with have some form of lease arrangement as part of their operations; the most prevalent being land and equipment leases. New accounting standards for leases were released back in 2017 and are just being implemented for 2022, due to an assortment of issues (COVID being one).
So, how will new standards impact accounting in your farm leases?
The changes will most readily affect operations that require financial statements that follow Generally Accepted Accounting Principles (GAAP) or Farm Financial Standards Council (which recommends following GAAP for lease standards). Generally, these are larger operations that require reviewed or audited financial statements for lending purposes.
Balance sheet reset
The most obvious changes will show up on the balance sheet. The balance sheet will now show the lease liabilities, with lease portions payable within one year shown as current portion. To offset the new liabilities, the balance sheet will show “Right-of-use” to segregate the leased assets from owned, capital assets.
Reporting the lease liabilities and right-of-use asset is determined by capitalizing the value and amortizing over the period of the lease, which involves determining the net present value of the payments using time value calculations. In short, there are a lot of technical aspects when handling leases to present in your financial statements.
Need an accountant?
The technical side of leases warrants working with accounting professionals. Accounting staff will need to be trained; procedures need to be updated to comply with the lease standards. Don’t be afraid to reach out to CPAs and consultants. CPAs and consultants have been preparing and working with clients to enact the changes for a while now.
The new standard will affect financial ratios. Farmers that will be affected by this change should talk to their lenders about them. One of the areas of most concern is the affect that including previously unreported liabilities will have on debt covenants, because it will increase liabilities without affecting equity.
As with most changes, communication will be your best means of preparation. Talk to your lender, CPA, or consultant to get an idea of how this change will affect your operation. Like most standards, there are caveats in reporting that should be considered and discussed; like a GAAP election to not report short-term leases.
The best thing you can do is make sure that everyone is on the same page and knows the plan to prevent any confusion down the road.
The opinions of the author are not necessarily those of Farm Futures or Farm Progress.
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