At long last, a company’s lease obligations – formerly buried in the back of the footnotes of the financial statements - are moving front and center onto the balance sheet, as a new leasing standard goes into effect for both US GAAP and IFRS companies at the beginning of this year.

CFA Institute has long advocated for recognition of lease obligations on the balance sheet, and while the measurement methodology does not incorporate our preferred method of reflecting current market conditions, we generally view this change in accounting as a positive development.

The new standard for leases is effective 1 January 2019 ,or just around the corner as the first quarter and half yearly results are being published. Because the vast majority of the change resulting from the leasing standard is related to lessee accounting, which has a broader impact for investors, this report focuses only on lessee accounting.

What’s changing? The short answer is that previously invisible leverage from leasing activities will now become visible, as all lease obligations will be presented as a liability on the balance sheet, offset by a “right of use asset,” representing the right to use the leased asset.

The longer answer is that analysts will need to do much more than look at the new lease liability on the balance sheet. Investors must understand the various methods of transition to the new standard, the fact that most companies won’t restate prior periods, and the differing treatment of leases under US GAAP and IFRS.

They will also have to understand the key assumptions underlying the new accounting, such as the discount rate selected, and how the changes in various financial statement Because many companies are not expected to restate prior years, comparability and trend analysis in financial statement captions and ratios will be difficult.

This paper will help investors unpack the impact to these ratios and adjust as necessary to ensure results are truly comparable.