While most attention has been focused on adding operating leases to the balance sheet for the first time, your clients should be aware that the regulation can also adversely affect debt covenants.

Debt covenants are restrictions that lenders (banks, creditors, debt holders) include in lending agreements to limit the borrower's actions. Adding leases to the balance sheet could dramatically increase both assets and liabilities, resulting in debt covenant violations.

No organization wants to violate its debt covenants. To ensure this isn’t a problem, encourage your clients to talk to their banks well before their financial statements begin to incorporate the new lease standard. Debt covenants can be written so clients remain in compliance, even after adding leases to the balance sheet.

Learn more by reading the full article on the CPA Now Blog.