FASB 13: Why Does it Matter?
ASC 842, enacted in 2016, sets a new accounting treatment for leases that have traditionally been written-off on expense budgets. The intent is to make operating leases more visible on the balance sheet, and it applies to leases for terms greater than 12 months.
The way a company classifies capital versus operating expenses is going to change. If certain conditions are met, under the new rule, this will necessitate listing assets as capital that used to fall under operating expenses with the old leasing model. For instance, if the term of the lease extends over 75% of the economic life of the asset, it will need to be treated as capital. Other requirements revolve around whether the present value of payments is more than ninety percent of the asset value, whether or not buyout will occur at the end of the engagement or if there will be any kind of asset transfer at the end of the term.
The Important Difference between CapEx and OpEx in FASB 13
To navigate the coming changes, it’s important to have a good grasp on the different expense models and how each impacts a company’s financial statements. A capital expenditure (CapEx) is a function of the investing portion of a business and is reflected on the balance sheet as a Capital Asset. Over time, the asset accumulates wear and tear, and it is depreciated (or amortized if it is a non-tangible asset).
On the other hand, operating expenditures (OpEx) are a function of the operations portion of a business. These expenditures are made within a given period for operations, and there is no impact on the balance sheet (other than impact to cash or S/T debt). For many organizations, this provides an added value to leasing equipment. However, due to the new rule change, OpEx will now show on the balance sheet when a lease over 12 months is involved.
Why This Matters Now
For many years, organizations have kept technology assets off their balance sheets. For IT, this might include computers, servers, storage and networking devices. In 2005, the SEC identified leasing as the largest off-balance sheet financing trend, covering $1.25 trillion of liabilities. FASB altered the accounting standards for leases to create more transparency, which is why the new rule was enacted. For public companies, the deadline to start reflecting the new standards is December 2018, while private companies have until December 2019. Private companies must tackle this in their new budget cycles to make sure they don’t have any surprises at the end of next year.
The new definition of a lease for this new rule focuses on whether there is an identified asset where the right to control is transferred to the lessee. If these criteria are met, the lease must now be classified on the balance sheet. For most companies, any leasing model that involves a transfer of right to control will be considered susceptible to the new rule.
Why You Need a Flexible Partner
It’s important to have the right partner for delivering IT services and to provide financial consumption choices. This partner will be able to offer a range of options including managed services, cloud services, leasing, and other financial arrangements that enable new technology acquisition that meet your business needs.
If moving to a CapEx model for IT equipment acquisition makes sense, then having a flexible partner who is able to respond with experts will help provide a way to continue getting value out of equipment leasing. Hybrid models can be arranged where the initial investment falls under CapEx and the variable billing as OpEx. It all depends on how an organization decides to adjust its financial reporting in light of the new rule and its goals.
ComportSecure’s flexible infrastructure consumption models provide a way to replace capital-intensive infrastructure purchases with monthly payments. In arrangements like these, vendors can retain right to control while allowing the client to only pay for what they use. Comport can also help you leverage HPE’s Flex Capacity and HPE GreenLake programs to fit different models, depending on how your organization plans to adjust to the changing rules.
In conclusion, imminent changes in lease accounting can have a major impact on the way technology is acquired. Alternative programs may be equally attractive to many organizations that have relied on operating leases to keep liabilities off the balance sheet, as well as organizations that prefer to consume IT on a pay-as-you-go basis. But a company’s approach to planning, implementing, and reporting equipment procurement will need to be updated to keep up with changing rules. Comport is a partner who understands the changes that are happening and is ready to help organizations adapt.
Reach out to Comport when planning and preparing for IT procurements in the coming year. Our experts are ready to help craft a solution that fits your specific needs.
 fasb.org video: Why a New Leases Standard?
 FASB in Focus (Feb 2016): https://www.fasb.org/cs/ContentServer?c=Document_C&cid=1176167901255&d=&pagename=FASB%2FDocument_C%2FDocumentPage