New Accounting Rule Could Change Your Balance Sheet
Even though tax season has come and gone, it might be a good time to visit your accountant. Recently released accounting standards regarding lease accounting could cause some major headaches for farmers as they are implemented over the next four years. According to Paul Neiffer, banks take a close look at your debt to asset ratios and these new guidelines may throw a wrench in your in balance sheet causing your banker some heartburn the next time you go to renew your operating loan.
Equipment. If you lease equipment for your dairy, there’s a good chance you’re leasing equipment through an operating lease. Under the current guidelines none of cash shows up on your balance sheet, which likely helps the debt to asset ratio your banker looks at when giving you a loan. Starting in 2020, under the new rules, you will be required to account for the total payments on a discounted basis as both an asset and a liability. “For example,” explains Neiffer, “if you’re going to loan a piece of equipment and you’re going to pay $500,000 over a five year period, you’re going to have to put almost $500,000 on your balance sheet as both an asset and a liability.” Neiffer says this will likely change your debt to asset ratio significantly.
Land. Similarly, Neiffer says, if a dairy farmer is cash-leasing land to grow any kind of feed, they are also required to capitalize the payment stream over the five or ten year period they have it leased. “If you’ve been leasing that ground for 20 years and it’s a five year lease, you might have to put the total payment equivalent of all 25 or 30 years on your balance sheet as both an asset and a liability,” he says. “That’s going to be an issue.”