Lease Presentation Update: Segment 2 Covenant Ratios

Описание: Welcome to the covenant ratio segment of the New Lease Presentation standard series. My name is Nate Graf and I'm a CPA at John A. Knutson & Company. Today, I will be discussing how the new standard affects common loan covenant ratios and what to look for.
As Matt discussed in the lease classification segment, right of use assets and lease liabilities will now appear on balance sheets. The right of use asset will be classified entirely as a long term asset but the lease liability will have a current and a long term portion. This means your current assets will stay the same, but your current liabilities will increase. The current portion of the liabilities will impact your current ratio and working capital.
Because of the overall increase in liabilities, the debt to equity ratio and the debt service ratio could be significantly increased. The impact of lease accounting depends on how many leases were previously classified as operating leases since capital leases were also shown as liabilities on the balance sheet under previous rules.
Again, if your company has lease agreements and you don't see changes from the 2021 to 2022 balance sheet they are likely noncompliant with GAAP. Tune in to the next segment to see how the new standard may affect a company's ability to get a loan or surety bond.