The recently updated lease accounting rules have an impact on all public and private companies, but no two companies are alike. In fact, 95% of public companies (77% of non-public) have found that adopting the recent accounting changes was somewhat or very difficult according to PwC Accounting Change Survey Results.
Accruent examined the effect of the new lease accounting rules on construction companies and found four primary factors that have added to the difficulty of adopting these accounting changes:
Most construction businesses have a large number of leased assets. These items will need to be added to the balance sheet, as a direct impact to the reported assets and liabilities. This means: Potentially rising accounting expenses, violation of existing debt covenants, higher borrowing costs.
Operating vs. Finance (a.k.a. Capital) leases
Historically, operating leases were not recorded on the balance sheet. The distinction between operating and finance leases is now less important under the new regulations. This means: A simple terminology change has capital leases referred to as finance leases. All leases with a duration of more than 12 months must now being recorded on the balance sheet. However, the interest and amortization of the expenses will be handled differently.
Longer lease terms
It is not uncommon to see leased assets structured as month-to-month leases in the construction world. Leases should be reviewed to determine if the lease really is a month-to-month agreement. This means: If the lessee is the sole user of the asset and provides appropriate cash flow to service the debt, a longer lease term can be implemented as the lessee is guaranteeing the debt. Review the intent between the lessor and lessee to determine the actual arrangement.
Internal job costing
Job costing is not a simple technique. If a lease payment is relieving debt rather than directly affecting the expense, it could increase the difficulty of accurately capturing these costs. This means: Verify that any new accounting procedures and qualified personnel are in place to ensure necessary costs are captured appropriately.
Implementing the new lease accounting standards is a challenge in every industry, but especially for those with significant numbers of real estate, equipment, and fleet leases. The earlier you start, the better off you will be when the deadline approaches.