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Lenders, Use New Leasing Guidance to Strengthen your Business Banking Relationships

Recent accounting guidance from the Financial Accounting Standards Board (FASB) has been released related to accounting for leases. While it’s not a topic that is likely to quicken anyone’s heartbeat, if you have business banking customers who have debt covenants as a part of their financing requirements, you could use the accounting pronouncement as a way to strengthen your relationship with them.

Leases Recorded on the Balance Sheet

While this may feel like a bookkeeping exercise, it’s more than that. Having to recognize the assets of the long term operating leases as well as the corresponding liabilities related to future payments on their balance sheets means that your customer’s debt to equity ratio is going to change. If you have debt covenants that require a certain level of debt to equity, your customer may find themselves in violation of the loan requirements. While the effective date for the guidance to take effect is some years away, use this topic as a way to reach out to your customers and let them know you’re thinking about them. For businesses who lease their equipment, have multiple locations, or warehousing facilities, you should expect to have a conversation with them regarding what the impact is likely to have on them and if it is necessary to make adjustments to their debt covenants.

Determining the Calculation

The accounting work that will be needed to do this correctly is extensive. They will need to quantify how many leases they have and then do an extensive net present value calculation for each lease. The guidance does not require the calculation for leases under 12 months.

Don’t wait for the effective date

For private companies the effective date is fiscal years beginning after December 15, 2019 but don’t wait for that year’s audit to discuss it with your customers. While someone at their organization is likely to know about this change, proactively hearing from you is just one more way that you can show them that you are a partner in their business success.