The impact of asu 2016-02 of a company of your choice Finance Paper

Impact of ASU 2016-02, Leases on GlaxoSmithKline
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Before the issue of Accounting Standards Update (ASU) 2016-02 on leases, there were grave concerns over the off-balance-sheet recording of leases. The United States Securities Exchange Commission (SEC) made a response to the concerns by researching the accounting information relating to leases (Sliwoski, 2017). As a result of the study, the commission came up with a report in 2005. The report revealed that over USD 1.25 is defaulted as a future obligation that is not recognized through the balance sheet recording of operating leases (Sliwoski, 2017). The disclosures relating to the operating contracts were, however, verified through the notes to the financial statements (Sliwoski, 2017). This data led to the need for a change in the accounting practices and requirements concerning leases.
The Federal Accounting Standards Board (FASB) is the authoritative body concerned with the formulation of Generally Accepted Accounting Principles (GAAPs) applicable to non-governmental business entities (fasb.org). The body is also relating to the making and communication of the amendments to the codifications. Due to increased concerns and the rising need for the modification of the leases accounting, the board made an update to the accounting standards of leases (fasb.org). This report will discuss the effect of the Accounting Standards Update (ASU) 2016-02, leases on reporting of contracts. The discussion bases on GlaxoSmithKline Plc. We will explore three elements of rentals in the company's financials, the effect of the new standards, and comparison of the company financial ratios related to the update. Lastly, we will look at the impact on the recommendations by stock analysts after the implementation by GlaxoSmithKline.
The FASB issued the ASU 2016-02 leases in February 2016 (fasb.org). The objective of the update was to improve transparency and universality in accounting for leases for organizations (fasb.org). In prior years, the accounting standards required the businesses to list capital leases on the balance sheet. The companies included the operating contracts on the additional notes to the financial report, thus concealing the actual value of the company’s financial obligations (Harm, 2020). ASU 2016-02, leases required all companies that enter into lease contracts to recognize leases as either financial lease or operating leases on the balance sheet (fasb.org). The capital leases became financial leases. The lessees will also recognize assets and liabilities that accrue from the lease contracts (Harm, 2020). The assets and liabilities include the recognition of 'the right-to-use' asset and obligations.
The new standard required the concerned entities to implement the amendments as from the beginning of 2019 (fasb.org). When applied, the new guidelines would significantly influence by providing a faithful representation of leasing operations (Sliwoski, 2017). This is because leases form a significant part of the financial obligations of most large businesses. The change in the standards would be displayed through the increases in the balance sheet expenses and the associated effects on the financial ratios of the company (Morales-Diaz and Zamora-Ramirez, 2018). From the changes, we anticipate that the interest on debt, leverage, and EBITDA value of the GlaxoSmithKline Company to increase. The ASU defines the effects on the balance sheet values but does not clarify the changes in the cash flows and the statement of financial position.
To adequately understand the scope of ASU 2016-02, on the lease adjustments, we will look at GlaxoSmithKline Plc. GlaxoSmithKline is a UK-based pharmaceutical that operates as a multinational (gsk.com). The company manufactures and supplies pharmaceutical and medicinal products. It is listed on the London Stock Exchange (LSE). The study of this company will help in analyzing how the update will help in addressing the accounting inconsistencies that arise in the recording of leases. Due to the vast involvement and operations of the pharmaceutical, the new standard will influence the company recording of PPE (Sliwoski, 2017). We will consider three elements to provide a more profound analysis of the relationship that exists between an entity and its leases.
The first item relating to leases is the contingent rent. GlaxoSmithKline uses this method when dealing with rentals (gsk.com). Contingent rent is a variable cost of a factor that varies with the future value of the lease factor. The future value is based on factors such as future use-value, future percentage of sales, future market prices, and future interest rates in the market. Contingent rent has a massive effect on a firm's profitability and market inflation. The value of the contingent rent highly depends on the lessee's operations, financial performance, a shift in prices, and the utility of the asset by the lessee. The GlaxoSmithKline financials reveal that the company includes the contingent liability in the accumulated debts of the consolidated balance sheet.
The second element that significantly features in GlaxoSmithKline lease operations is the minimum rent liabilities. Minimum rent expense is the total discounted value that the lessee forecasts to pay over the contractual term of the lease. A note on GlaxoSmithKline financials stated that the company records minimum rent costs on the consolidated financial statements (gsk.com). The recording is on a straight-line basis for the contractual period of the lease. When the company adjusts the cash rent accruals in the combined balance sheet, it records as deferred rent (gsk.com). The company employs this method when dealing with capital leases. The third featured factor is deferred rent obligation. From the analysis of GlaxoSmithKline records, the company includes deferred rent liabilities relating to tenant allowances and rent holidays on the consolidated balance sheet, like other long-term liabilities.
ASU 2016-02 required that all the associated entities implement the development effective from 2019 (fasb.org). The event will have a significant influence on the recording of leases. It will ensure there is a maximum presentation of disclosures that relate to leasing. The balance sheet report will include both finance and operating leases as compared to the previous reporting, which only included finance leases as capital leases. The company will consist of the right-to-use asset and liabilities that accrue from lease transactions. Analysis of ASU 2016-02 and its potential impact on large organizations such as GlaxoSmithKline reveal that the new directives play a critical in accounting for leases. The instructions increase the balance sheet expenses, interest rates that relate to contracts, and leverage.
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