During the uncertainty of the pandemic in 2020, the Financial Accounting Standards Board (FASB) granted a temporary reprieve for private companies, delaying their deadline for implementing new lease accounting practices. If your construction firm is privately held and hasn’t yet adjusted how you report leases on your financial reporting documents, keep reading for more information to get you started.
The new FASB rules for reporting leases are required to be used by all private companies for all fiscal years that begin after December 15, 2021. Any lease or rental agreement with a term of more than 12 months is required to be reported per the new rules. The goal of the new rules is to simplify the process of comparing financial statements for different companies.
Leases that may be affected
While it’s important to review all of your leases to determine if they meet the minimum requirements for the new lease reporting methods, here are a few examples of what will be changing.
- Capital leases: While capital leases have been reported at a long-term asset with a corresponding liability, the new lease accounting standards will have them reported as a long-term right-to-use asset.
- Operating leases: If the property in a lease isn’t purchased or likely to be purchased, or the terms of the lease don’t cover a major part of the economic life of the asset, or the asset was not specially designed for the lessee, it most likely qualifies as an operating lease. While operating leases may have been considered an ‘off-balance-sheet risk,’ they are now recorded on the income statement and cash flow statement.
Potential impacts to construction firms
A change in reporting requirements may seem irrelevant to the rest of business operations and there are a few funding and obligation matters that may be affected. Covenants written into loan agreements with banks may no longer be met if the new reporting methods change financial ratios. In addition, with surety capital loans granted based on working capital, that capital may seem lower than previous years on the financial statements.
Start implementing changes now
It may seem like changing reporting measures won’t take up much time; it’s better to start early than be rushed at the end. Here are some steps to consider:
- Locate executed copies of all lease agreements
- Identify who the key players will be in the transition and make sure they are trained on the new lease accounting standards
- Decide on a new process for classifying leases and determine how existing leases are qualified.
- Update policies and procedures to reflect the changes
As you go through the process of updating your lease accounting practices at your construction firm, consulting with a certified accountant can help streamline the process. Reach out to our team of professionals today.