By: W esley Veigle, CPA, Manager, Boyer & Ritter LLC
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What Construction Contractors Need to Know About the New Lease Accounting Standard for 2022
fter granting a yearlong delay due to COVID-19, non-public companies must adopt the new lease accounting guidelines that greatly expands the financial reporting requirements for leases. The new standard is effective for all non-public companies for fiscal years beginning after December 15, 2021.
Why the Change
The change is part of the Financial Accounting Standards Board’s (FASB) efforts to increase financial transparency by showing the full impact of leases on a company’s balance sheet. The old standard faced criticism for not requiring sufficient information about a company’s leasing transactions and allowed room for various interpretations. In response, the FASB issued Accounting Standards Codification 842 – Leases, to address these concerns.
Effects on Your Company
In the past, only capital leases were listed on the balance sheet, and operating leases were expensed straight-line on the income statement. The new standard requires the inclusion of almost all leases, both new and existing, with terms of greater than 1 year on the balance sheet. For construction contractors, the new standard applies for all leases, including offices and warehouses, trucks, and
other any other leased equipment. These leases will now be presented on the balance sheet as a right-of-use-asset and a corresponding lease liability. Depending on the size and quantity of your leases, the company’s overall assets and liabilities will be significantly higher than prior periods. These changes may cause headaches with existing banking and bonding agreements.
Potential Impacts with Lenders and Sureties Since the leases now appear on your balance sheet, they may have a significant effect on common lending and bonding ratios such as the company’s leverage (debt to equity) and return on assets (income to assets).
While the new reporting does not change the underlying financial soundness of your company, the sudden addition of liabilities to your balance sheet may at least necessitate a conversation with lenders and sureties. It’s imperative to have these conversations with these parties before the end of the year.
Deciding how to apply and account for the new standard is complex and may take more than merely changing some lines on a spreadsheet. The new standard could add significant amounts to both sides of the balance sheet that were not there before. The changes could directly affect ratios and other financial covenants for banking and bonding purposes, and force additional analysis for future considerations regarding buying versus leasing equipment. It is important that you understand how to comply with the new standard and how to navigate discussion with your lender and sureties.
Wesley Veigle, CPA, is a manager at Boyer & Ritter LLC with experience providing tax and accounting services for construction industry clients and other closely-held business entities. Wesley can be reached at (717) 761-7210 or firstname.lastname@example.org.