Pub. 7 2017 Issue 1

19 You will want to discuss the difference between operating leases and finance leases, and especially the difference in expenses, with anyone who uses the dealership’s financial statements so that they can plan appropriately for the change. The discussion should include owners, franchisors, and third- party lenders. What else do you need to know about the change? It might change your thinking about buying instead of leasing. After all, if the reason for leasing in the past had to do with taking advantage of financing that didn’t have to be on the balance sheet, that reason is now going away. How will the changes specifically affect dealerships? • The work load for the accounting group is going to increase significantly. • The accounting group will also need training so they know how to implement the new standard. • The standard is using an accounting concept that classifies the right-of-use lease asset as an asset that is nonfinancial, along the same lines as intangibles and property, plant and equipment. That means the new operating lease liability will not be offset by a current asset, and the value of the lease asset might not equal the liability associated with it. You will have to consider the part of the lease liability that you will pay during the years to come as a current liability. • Deferred income tax expenses will have to change when the size of deferred tax assets and liabilities change. • As the numbers on your balance sheets change, that might affect the way stakeholders think about the financial strength of the dealership. For example, current ratio, return on assets and working capital will all be affected even though you will have the same cash flow you had before. • Debt covenants with current lenders might be affected because of changes in financial ratios. In addition, it might be harder or more expensive to get loans in the future. Most dealerships (and for that matter, most companies in all industries) are probably not ready for this transition. What can you do to prepare your dealership? • Go through your agreements. Exactly how many leases do you have? • Classify your leases. How many are finance leases, and how many are operating leases? • Read the guidelines for implementing the changes so you know how to record the leases on your balance sheet. • The new standard requires that you gather information for disclosures. This is going to take time because it involves a lot of work. Get started now. • Talk to whoever does your accounting. Although the new standard is relatively straightforward, implementation always brings up unexpected nuances and can be more complicated than you think it will be. You will want to have regular conversations with a professional as you navigate the process. • Talk to your lenders and prepare them for any changes that might be ahead. • Decide whether you need to make any changes to the way you do business. One important question to consider, for example, is whether your dealership needs to make a major shift from leasing to buying.  Keeping Up With Compliance Let Reynolds Document Services help! Contact your Reynolds Document Services Consultant to learn more. 800.344.0996 LAW@reyrey.com © 2016 The Reynolds and Reynolds Company.All rights reserved.