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What does the new accounting standard mean for those that lease equipment and software?

Leasing Software

On February 25, 2016, the Financial Accounting Standards Board (“FASB”) issued an Accounting Standards (ASU) update intended to improve financial reporting about leasing transactions.  This ASU affects all companies and other organizations that lease assets such as real estate, airplanes, manufacturing equipment, construction equipment, title vehicles, office equipment, computer systems, and software.

The new guidance responds to requests from investors and other financial statement users for a more faithful representation of a business’ leasing activities. It ends what the SEC and other stakeholders have identified as one of the largest forms of off-balance sheet accounting while requiring more disclosures related to leasing transactions.

Under the prior accounting model, organizations applied a classification test to determine the accounting for the lease arrangement:

  • Some leases were classified as capital leases (for example, a lease of equipment for nearly all of its useful life) whereby the lessee would recognize lease assets and liabilities on the balance sheet.
  • Other leases are classified as operating leases (for example, a lease of office space for 10 years) whereby the lessee would not recognize lease assets or liabilities on the balance sheet.

For Dimension Funding which supplies capital leasing and financing for equipment and software,  it has very little effect.  First, we consider financing of up to $500,000 with no requirement for financials. Second of all the financing and leasing products we offer are all considered capital leases, which for accounting purposes has been left unchanged.

When it comes to financing software, the advantages are the savings you can acquire by buying multi-year subscriptions as well as conserving your upfront cash outlay.

With rates as low as they are today, small and large companies can take advantage of our low fixed rate, unsecured agreements. However, should a company use their line of credit which is usually secured by all assets of the business, and sometimes personally,  these new accounting standards might limit their borrowing capacity. Check us out http://www.dimensionfunding.com/financing-programs/.

This document does not in anyway represent tax or accounting advice, please consult with your accountant for more information
- Mark Grimes, National Account Manager Dimension Funding, LLC with 18 years of experience in capital lease financing.

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Tagged With: General, Lease ERP Software

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