The 5 Critical Aspects That Can Make Your Commercial Cleaning Enterprise a Resounding Success

The Financial Accounting Standards Board (FASB) on August, 17, 2010 released their "exposure draft" requiring companies to record nearly all leases on their balance sheets as a "right to use" asset, and a corresponding "future lease payment - liability".; What does this mean to your business in layman terms?; This proposal in essence does away with operating leases; all leases (unless immaterial) would be capitalized using the present value of the minimum lease payments.; Therefore, businesses who in the past had off-balance sheet lease obligations, must now record these obligations on their balance sheet.

A key point to consider with regards to the proposed lease accounting changes is that, in all likelihood, existing operating leases, signed prior to the implementation of the new rules, will require reclassification as capital leases that must be accounted for on the balance sheet. Since operating lease obligations can represent a larger liability than all balance sheet assets combined, lease reclassification can significantly alter the businesses balance sheet.

Part of the purpose for this is to coordinate lease accounting standards with the International Accounting Standards Board (IASB), which sets accounting standards for Europe and many other countries.

The FASB will accept public comments on this proposed change through December 15, 2010.; If FASB makes a final decision in 2011 regarding this proposed change to lease accounting, the new rules will go into effect in 2013.

Commercial Real Estate:

In conclusion, it is recommended that landlords and tenants begin preparing for this change by reviewing their leases with their commercial real estate broker and discussing the financial ramifications with their CFO, outside accountant and tax accountant to avoid potential financial surprises if/when the accounting changes are adopted.;

Addendum - Definition of Capital and Operating Leases:

The basic concept of lease accounting is that some leases are merely rentals, whereas others are effectively purchases. The lessor (the company who receives the lease payments) anticipates this, and charges the lessee (the company who uses the asset) a lease payment that will recover all of the lease's costs, including a profit.; This transaction is called a capital lease, however it is essentially a purchase with a loan, as such an asset and liability must be recorded on the lessee's financial statements. Essentially, the capital lease payments are considered repayments of a loan; depreciation and interest expense, rather than lease expense, are then recorded on the income statement.

Operating leases do not normally affect a company's balance sheet. If a lease has scheduled changes in the lease payment (for instance, a planned increase for inflation, or a lease holiday for the first six months), the rent expense is to be recognized on an equal basis over the life of the lease. The difference between the lease expense recognized and the lease actually paid is considered a deferred liability (for the lessee, if the leases are increasing) or asset (if decreasing).

Whether capital or operating, the future minimum lease commitments must also be disclosed as a footnote in the financial statements.

;A lease is capital if any one of the following four tests is met:

;1) The lease conveys ownership to the lessee at the end of the lease term;

FASB Proposed Lease Accounting Changes - Impacts on Commercial Real Estate

Unlike a retail businesses, a Commercial Cleaning Business would not require too much capital to start with. In business terms, this is a heck of a great deal!

Make sure you build your business to last. Own your business - don't let it own you.