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The main change in the new standard is that lessees must recognize, in their balance sheets, leased assets and lease liabilities for operating leases. Currently, lessees do not record either assets or liabilities for operating leases.
The new standard covers all entities – both for-profit and nonprofit - that issue financial statements in accordance with U.S.. generally accepted accounting principles (GAAP).
For non-public entities, the standard takes effect in years beginning after December 15, 2020 (i.e., calendar 2021), with early application permitted. It will apply to all leases in effect as of the beginning of the earliest comparative period presented; in other words, if 2020 comparative statements are included with 2021 statements, leases in effect at January 1, 2020 will be covered.
Depending on the number and value of leases, the new standard could have a large effect on lessee balance sheets by increasing both assets and liabilities. This, in turn will affect certain balance sheet ratios, particularly the current ratio and the debt-equity ratio. Since many loan agreement contain covenants that specify minimum current ratios and maximum debt-equity ratios, lessees may want to discuss the effects of the new standard with their lenders before it goes into effect and make appropriate adjustments to affected covenants.