Hot Topic in Valuation – Will New Lease Accounting Rules Affect Business Valuation?

By ASL Business Valuation Group

The new lease accounting guidance ASC 842 brings previously off-balance sheet operating leases onto a company’s balance sheet. They are now reflected as a “right-of-use” asset and as a corresponding operating lease liability. This can increase a company’s reported assets and liabilities, affecting key financial ratios. The income statement and the statement of cash flow are affected by a lesser degree than the balance sheet. Companies will continue to expense operating leases and the depreciation expense and interest expense may be higher for some companies.

A change in an accounting standard, by itself, should not have an impact on the conclusion of value; however, without proper treatment, it could impact the ending conclusion, and adjustments need to be made within the valuation analysis to prevent this.  For example, in the discounted cash flow method, analysts should ensure that projected cash flows and discount rates accurately reflect the new accounting treatment of leases. Consulting with valuation experts can help navigate these changes and ensure that valuations accurately reflect the economic reality of the business while still incorporating the new rules.  If you have questions about how the new lease accounting standards impact your valuation, please contact the Business Valuation Group at ASL.