Times are always changing. How many of you remember the Statement of Financial Position or the Statement of Changes in Financial Position? The rest of you are scratching your heads wondering, what am I talking about? Today, they are called the Balance Sheet and Cash Flow Statement, but not in 1973. Not only have the names changed over the years, but also the content and information provided in the statements.
Financial statements continue to change with the balance sheet about to undergo changes resulting from two new accounting standards, these changes however may lead to adverse effects and unintended reactions. The most obvious new standard affecting the balance sheet is ASU 2016-02: Leases (Topic 842).
Under the current standards for leases, the lessee is not required to recognize the assets and liabilities arising from operating leases on the balance sheet. These leases are considered off balance sheet, only appearing as a disclosure in the footnotes to the financial statements. This will change with the adoption of ASC 842 beginning in December 2018. Lessees will then be required to recognize a right-to-use asset and a lease liability for long term leases. Both assets and liabilities could increase significantly for companies depending on the number of leases and value of those leases.
A less obvious but still significant impact on the balance sheet, will be the FASB’s proposed changes for debt classification, Debt (Topic 470). The FASB expects the proposed changes to reduce the cost and complexity when determining whether debt should be classified as current or noncurrent on the balance sheet. However, the proposed changes could result in an adverse reaction by reducing a company’s available credit. Reclassifying debt between current and noncurrent liabilities effects working capital, an important factor used by lenders to determine the debt capacity of the company. For example, the proposed standard could require current debt that has been refinanced to remain classified as current. The greater current debt would reduce reported working capital, thus reducing the ability to borrow funds.
Bloomberg BNA staff correspondent Denise Lugo wrote about the proposed rule changes in her article “Companies Might Find Credit Crunched under New Accounting Rule.” Click here to see the full story (subscription required).
Construction companies in particular are concerned about the interaction of the proposed debt classification rules with the new lease accounting standard. Will the combined rules adversely affect the ratio analysis of their balance sheet? Will the companies still be in compliance with their existing debt agreements and what about the future availability of financing? These questions cannot be answered until both standards are fully adopted. Of course, the FASB may still alter the proposal for debt classification based on comment letters received from the public.
Lugo noted these concerns in her article “Construction Companies Reeling over New Debt Classification Rules.” Click here to see the full story (subscription required).
The financial statements will continue to change in the future. The FASB’s objective is always to provide investors and users of the financial statements with more transparency and additional information to make informed decisions. However, these changes may also have an adverse reaction on the companies adopting the changes. In this case, jeopardizing future financing and once again proving “for every action, there is an equal and opposite reaction.”
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