On February 25, 2016, the FASB issued a new standard, Leases (ASC 842). Certain provisions of the new standard are particularly noteworthy for portfolio companies owned by private equity investors. Calendar year-end public companies adopting the standard on January 1, 2019 will need to apply the guidance to the 2017 and 2018 comparative periods presented.
Most notably, the new standard requires lessees to recognize virtually all leases (other than short-term leases) on their balance sheet. This means that lessees will need to recognize a liability for payment obligations under the lease and a corresponding right-of-use asset for the right to use the leased asset during the lease term.
Portfolio companies should consider the impact of the new standard on metrics, covenants, and earnings. They should also consider the impact on systems, processes, and controls.
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