Knotel and other providers of flexible office space have found an unexpected ally: the Financial Accounting Standards Board, commonly known as FASB.
Currently, companies aren’t required to include real estate leases on their balance sheets. That will change by the end of 2018, thanks to an accounting standards modification that’s designed to improve financial reporting about leases.
First announced in February 2016, the rule change was 10 years in the making and affects all leased assets, including manufacturing equipment and airplanes. It requires companies to recognize assets and liabilities for leases with terms longer than 12 months. Previously, organizations only had to include capital leases on balance sheets, but with the rule change, they must include operating leases too.
“The new guidance responds to requests from investors and other financial statement users for a more faithful representation of an organization’s leasing activities. It ends what the U.S. Securities and Exchange Commission and other stakeholders have identified as one of the largest forms of off-balance sheet accounting, while requiring more disclosures related to leasing transactions,” FASB Chair Russell G. Golden stated in a press release.
As part of the change, companies will need to help investors “better understand the amount, timing, and uncertainty of cash flows arising from leases,” according to FASB’s press release. That means giving investors disclosures that “include qualitative and quantitative requirements, providing additional information about the amounts recorded in the financial statements.”
The change will take effect for public companies beginning after Dec. 15, 2018, and one year later for all other organizations. In 2017, Knotel was already leveraging that looming accounting headache in its sales pitches, reminding potential clients the rule change doesn’t apply to leases that are 12 months or shorter.
“The FASB rule change will impose meaningful administrative and reporting costs on companies with leases,” says Eugene Lee, Knotel’s global head of real estate and business development. “The flexible, shorter-term arrangements that Knotel specializes in can help reduce that burden.”
This story originally appeared in the March/April 2018 print edition of Middle Market Growth magazine. Read the full issue in the archive.
S.A. Swanson is a business writer based in the Chicago area. She frequently covers technology.