The coworking trend is no longer just for freelancers — By 2022, there will be more than 1 million co-working members in the US alone, and at large, Fortune 500 companies are putting sections of their teams into coworking spaces. Recent updates in the business world suggest this rise might have something to do with how your lease affects your finances.
The number of bigger teams in coworking spaces could see a dramatic increase due to a new Financial Accounting Standards Board (FASB) standards update that requires companies to list long-term leases on their balance sheet to increase transparency and comparability among organizations.
So what is the deal and how does this affect you? Let’s break it down.
What is the Financial Accounting Standards Board?
Since 1973, the Financial Accounting Standards Board (FASB) has been an independent, private organization based in the US providing financial reporting and accounting standards for non-profit, public, and private organizations that follow generally accepted accounting principles (GAAP). U.S law requires public companies and organizations that release public, financial statements to follow GAAP guidelines, and the SEC recognizes the FASB as the designated accounting standard setter for public companies.
What are the new rules?
The FASB released a new standards update (ASU 2016-02) pertaining to leases in February 2016 to “increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements.”
The previous guidelines set for lease accounting was seen as not providing a true representation of leasing transactions, specifically by not requiring companies to recognize the assets and liabilities from operating leases on their balance sheets. Operating leases do not transfer ownership rights at the end of a term. For example, a car loan where the car is owned outright at the end of the term (capital lease) vs. a car lease where the lessee makes payments to use but does not own the car at the end of the term (operating lease)1.
This new update comes into effect at the end of 2018 for public companies and the end of 2019 for private companies, requiring them to account for the full value of an operating or financing lease greater than 12 months as both a liability and an asset.
How does it affect you?
For companies with an office lease for longer than 12 months, you will now have to report both the asset and the liability of the full value of the lease on your balance sheet. This could add millions of dollars in assets and liabilities to businesses’ balance sheets that were previously not recorded, and for some companies, this new calculation could cause reductions to regulatory capital, shareholder equity, or reduced debt-to-equity ratios.
For public companies, this update will take effect December 15, 2018 and interim periods within those fiscal years. For other organizations, the ASU will take effect for fiscal years beginning after December 15, 2019 and interim periods within fiscal years beginning after December 15, 2020.
What can you do about it?
For those that are interested and have the capital to, purchasing your property will look very similar to having an operating lease for more than 12 months. However, if you are leasing for 12 months or less, then the new balance sheet requirements will not apply.
One way to not qualify for these new regulations is to join a coworking or flexible workspace for a commitment of 12 months or under.
“The Yard’s members will be able to avoid the potentially negative impact of the new FASB reporting standards through their flexible, month-to-month membership agreements,” explains CEO & Co-Founder Morris Levy. “With our member teams ranging from solo entrepreneurs to companies with more than 200 employees, we expect to see a continued interest in more amenable solutions to long-term leases that could negatively impact a business’s investment prospects.”
For those currently in a lease of more than one year or considering their next space, now is the perfect time to find a flexible membership agreement for the remainder of 2018 and beyond to avoid a potential impact on their business. Take steps to learn about how your lease affects your finances, and make the most of these new changes.
Interested in talking with our team further about opting for a more flexible space?
Schedule your tour of The Yard to learn more!
- Trainer, David. “Impact Of Operating Leases Moving To Balance Sheet.” Forbes. May 01, 2018. Accessed November 19, 2018. https://www.forbes.com/sites/greatspeculations/2018/05/01/impact-of-operating-leases-moving-to-balance-sheet/#1f8637832c55.