How to Adjust Quarterly Ratios Under ASC 842

As a CFO, managing the impacts of ASC 842 on financial ratios like debt-to-equity and return on assets is essential for maintaining transparency and supporting strategic decisions. Quarterly Ratio Impact Analysis (QRIA) serves as a critical tool for monitoring these effects, allowing for timely adjustments that enhance the company’s financial presentation. This analysis provides a regular, detailed assessment of how ASC 842 affects ratios, helping management, investors, and other stakeholders understand the company’s evolving financial position. Here’s an in-depth look at how QRIA aids in strategic planning and supports your organization’s financial health.

Benefits of QRIA Under ASC 842

• Early Detection of Financial Ratio Shifts: ASC 842 can cause significant quarterly shifts in debt-to-equity, ROA, and other key ratios. QRIA allows companies to detect these shifts early, ensuring that stakeholders aren’t taken by surprise and that management can prepare effective strategies to mitigate undesirable changes.


• Improved Strategic Planning: By providing regular updates on financial ratio movements, QRIA supports strategic planning for activities such as capital allocation, budgeting, and risk management. For example, if QRIA reveals a rising debt-to-equity ratio, the company can proactively evaluate leasing options or financing structures to maintain desired leverage levels.


• Enhanced Communication with Stakeholders: Stakeholders rely on financial ratios to assess a company’s stability and financial health. Quarterly updates on the impact of ASC 842 facilitate clear communication, helping explain fluctuations in key metrics and reassure stakeholders about the company's proactive management of lease-related accounting impacts.


• Informed Decision-Making for Lease Structuring: QRIA insights allow CFOs to review leasing decisions in light of their impact on ratios, adjusting lease terms to achieve more favorable ratios. This approach is particularly valuable for decisions involving long-term lease renewals or high-value assets, where even slight changes can affect financial ratios significantly.

Key Ratios QRIA Tracks Under ASC 842

• Debt-to-Equity Ratio
  • Impact: It depends on the lease classification.
    • Finance lease: the liability is generally treated as debt, so it raises the ratio. Deloitte's Roadmap: Leases, section 14.2.1, notes that "finance lease liabilities are the equivalent of debt."
    • Operating lease: the liability is an operating liability rather than debt (ASU 2016-02, BC14), so a ratio built on total debt may not change significantly (KPMG Handbook: Leases, Question 6.1.10).
  • QRIA Advantage: Detects quarter-over-quarter changes, enabling the CFO to adjust leverage or consider alternative financing options.


• Current Ratio
  • Impact: ASC 842 adds current lease liabilities, potentially lowering the current ratio and signaling reduced liquidity.
  • QRIA Advantage: Allows finance teams to monitor and adjust short-term liabilities by refining lease terms or utilizing variable leases.


• Return on Assets (ROA)
  • Impact: By adding ROU assets, ASC 842 increases the asset base, often reducing ROA.
  • QRIA Advantage: Quarterly tracking of ROA shifts enables a proactive approach to asset utilization and cost management, ensuring that assets are deployed effectively.


• EBITDA
  • Impact: It depends on the lease classification.
    • Finance lease: the cost is amortization of the right-of-use asset plus interest on the lease liability (ASC 842-20-25-5). Both sit below EBITDA, so EBITDA is higher than it would be with a rent expense.
    • Operating lease: the lessee records a single straight-line lease cost in operating expenses (ASC 842-20-25-6), so EBITDA is the same as it would be with a rent expense. See Deloitte's Roadmap: Leases, section 14.2.2.2, "Operating Leases — A Single Lease Expense."
  • QRIA Advantage: Helps CFOs prepare quarterly updates that explain changes in profitability to investors and provide clarity on the true operational performance.

Strategic Adjustments Based on QRIA Findings

Quarterly Ratio Impact Analysis provides actionable insights that can drive strategic adjustments, including:

• Lease Structuring Adjustments: Review lease terms and consider shorter leases or leases with variable payments to minimize balance sheet impact. QRIA can indicate when such adjustments could enhance ratios without affecting operational flexibility.


• Evaluating Buy vs. Lease Decisions: QRIA helps assess the impact of lease liabilities on balance sheet ratios. For significant assets, it may reveal that purchasing assets could result in more favorable ratios compared to leasing, aiding capital allocation decisions.


• Capital Structure Optimization: If QRIA reveals a consistent increase in the debt-to-equity ratio, finance teams may explore options like equity financing or asset sales to reduce leverage and balance ratios, maintaining desired credit metrics.


• Enhanced Budget and Cash Flow Planning: QRIA’s quarterly review of current liabilities and interest coverage can help refine budget allocations and cash flow planning, ensuring the business remains well-prepared for upcoming lease-related payments.

How iLeasePro Can Help Address the Challenges of ASC 842 and QRIA

iLeasePro offers a comprehensive lease management solution that simplifies ASC 842 compliance and streamlines QRIA processes. Our platform enables accurate calculation and tracking of lease liabilities and ROU assets, allowing for real-time insights into ASC 842’s impact on financial ratios. With built-in reporting tools, iLeasePro provides quarterly analyses that help CFOs monitor and manage ratio changes, supporting strategic decisions and stakeholder communication.

By centralizing lease data and offering flexible scenario modeling, iLeasePro empowers your organization to make informed leasing and financial structuring decisions, ensuring a proactive approach to ASC 842 challenges. Let iLeasePro be your partner in achieving transparency, compliance, and financial stability under the new lease accounting standards.

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