Agribusiness BlogFarm CPA Today

How Will New Lease Accounting Rules Affect You?

If you borrow money from a bank for farm operations, you will likely have loan covenants that call for certain net worth to debt ratios.  Recently released accounting standards regarding lease accounting may require your bank to change these covenants.  Knowing how these new rules will affect your farm is important so that you can plan with your bank accordingly.  The good news is that these rules do not go into effect until 2020.

If you purchase equipment using a capital lease, the rules do not change too much.  There is some tweaking on how the lease is calculated and how to report the lease in the your footnotes to your financial statements, but that is about it.

The major change deals with operating leases, especially cash lease farm ground.  If you rent farm land under a cash lease and the contract is for more than a year, you will be required to capitalize the lease payments as both an asset and a liability on your balance sheet.  Many farmers have rental arrangements that can last ten years or more.  Also, if the lease is only for a year, but it is highly likely that the lease will continue, the rules require you to determine your estimated length of the lease and book those payments too.

For example, assume Farmer Jones cash leases 1,000 acres at $300 per acre on a five-year contract.  He will be required to book an asset of about $1.5 million (it will be less due to an “interest” discount) and a liability for about the same amount (there can be differences based on timing of lease payments).  Under the old rules, no asset or liability was required.  If his net worth was $1 million and he had debt of $1 million, his net worth to debt ratio was 1:1.  Under the new rules, his net worth remains the same, however, his liabilities now rise to $2.5 million.  This reduces his net worth to debt ratio from 1:1 to .4:1 which is a dramatic drop even though economically nothing has changed.

Additionally, if Farmer Jones had farmed this ground for many years and is expected to continue farming after the five years is up, he may need to book even more of a liability.

The key is to know the new rules and how it might affect your operation and your relationship with your bank.

Paul Neiffer, CPA

CliftonLarsonAllen LLP

 

  • Principal
  • CliftonLarsonAllen
  • Yakima, Washington
  • 509-823-2920

Paul Neiffer is a certified public accountant and business advisor specializing in income taxation, accounting services, and succession planning for farmers and agribusiness processors. Paul is a partner with CliftonLarsonAllen in Yakima, Washington, as well as a regular speaker at national conferences and contributor at agweb.com. Raised on a farm in central Washington, he has been immersed in the ag industry his entire life, including the last 30 years professionally. In fact, Paul drives combine each summer for his cousins and that is what he considers a vacation. Leave a comment for Paul. If you would like to leave a comment for Paul, follow the link above, however, please make sure to include your email address so that he can reply to your comment (your email address will not automatically show up).

Comments

The $100 default payment would be expense if it is paid. In almost all cases, you will have a direct offsetting liability when you set up the asset. As the lease is “earned” this will be expense and the cash payment will eliminate the liability.

So Paul if your lease specifies damages in case of default ,say $100/A on a $300/A lease, realizing that at some price another lease will be found, can you book the asset at $300 and the liability at $100 ??
Question is can a good attorney solve this ?

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