Bottom-Line Implications of New Lease Accounting Standards: What Leaders of Not-for-Profit Organizations Should Know

Public Finance Alert

A new lease accounting standard that takes effect next year could significantly impact financial covenant calculations by not-for-profit organizations under their borrowing agreements as well as the structure of future borrowing agreements and their choice of financing product.
The Financial Accounting Standards Board issued Accounting Standards Update (ASU) 2016-02 – Leases (Topic 842) in February 2016. This new lease accounting standard change will require organizations to report all leases longer than 12 months on their balance sheets. Prior to the change, only capital leases were recorded as assets and liabilities on the balance sheet, whereas operating leases impacted only the income statement and, in some cases, were reported in notes to the financial statements.
Among not-for-profit organizations that have debt – whether publicly issued or privately placed with a lender – one important consideration is whether recording operating leases on the balance sheet will trigger financial covenant defaults for borrowers.

Read more from Orrick and H2C in a joint article focused on not-for-profit healthcare organizations but equally relevant to educational, cultural and other not-for-profit organizations.