Lease Accounting is Changing. Could You Violate a Covenant?

By Thomas Laine, CPA

Did you know…

…that the recent changes in lease accounting standards might cause you to #violate a lending #covenant in your company’s financing agreement, even if nothing else changes in your profitability or cash flow?  Under the new accounting standards update, all of your lease liabilities (for leases longer than 12 months), be it for movable or real property, must be reflected on the GAAP balance sheet you present to your lender(s).  The current practice of treating long-term operating leases as off-balance sheet obligations will no longer be acceptable under GAAP.  With additional lease obligations now reflected as liabilities on your balance sheet, it’s possible you could find yourself in violation of your loan covenants.

This accounting standards update applies to periods beginning on or after December 15, 2019 for privately held businesses (December 15, 2018 for publicly traded companies), but now is the time to begin planning for this change.  Let us help you evaluate the impact this change may have on your balance sheet and loan covenants while there is still ample time to work with your lenders on potential modifications to your finance agreements.