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Insight On Lease Accounting Classification Testing

Insight on lease accounting classification testing

After the lease versus buy analysis has been conducted, the decision to lease is typically made for excellent financial reasons, which may include:

•    Significant down payments are not required by many lessors

•    Better leveraging of your buying power

•    If you need to update equipment continually, leasing is a smart option

Lease classification testing

The next step is to consider how this decision will coordinate with the new lease accounting standards.  Under the lease test of FAS 13 and ASC 840, leases were kept off the balance sheet by avoiding classification as a finance lease. 

Leases are required to be classified into two categories: operating leases or finance leases. Under the new standards, most leases will be classified as finance leases, with exceptions for short-term leases and low-value leases. As required by the new FASB lease accounting standards, the next step is the classification of the lease and that classification will be retained throughout the life of the lease unless there is a change such as a contract modification, or a change in whether a purchase option is implemented.

As the company prepares to implement there may be many questions. Traditionally, accounting advisors may be called upon to answer some of these questions, but there may be another closer source that just might be overlooked: your lease accounting software.

How can lease accounting software help with classification testing?

While it cannot make decisions for you, it can provide the platform to test various leasing scenarios without every disturbing your live data. What if the decision is made to change the terms of the lease agreement? Will it change the bottom line? What will be the best possible conditions for equipment buyouts and renewals? In addition, some specific term lengths may be enforced by lenders adding to the cost if the lease term if it extends beyond the length of time you need the equipment. The appropriate lease software choice will show how various decisions will impact your business operations. Powerful information customized to your exact specification can prevent mistakes and support better business decisions. With CoStar as a member of the lease accounting team companies will not only meet the biggest change in the history of lease accounting but also realize cost savings and improve the balance sheet.