How Does ASC 842 Impact Construction Companies?

Update: On Wednesday, June 3, 2020, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update 2020-05, which granted a one-year delay on the required implementation dates of the new lease and revenue recognition standards for certain entities.

ASC 842 Construction Industry Impacts

The accounting industry is facing one of its biggest recent changes with the new lease guidance that is covered in ASC 842. For private companies, this standard was originally planned to go into effect on January 1, 2020.  However, due to the complexity involved with implementation and the overall lack of preparedness of many private companies, the FASB has delayed the effective date to January 1, 2021. Therefore, while private companies still have some time before implementation, construction firms should be aware of the implications of this new standard and be ready to educate their stakeholders.  For those looking for the high-level summary of the impact of the standard, the main takeaway is that nearly all leasing arrangements will now be required to be recorded on a company’s balance sheet. Under current GAAP, most leases are not recorded as an asset and liability, even though a Company may have a non-cancelable obligation.  For the construction industry, these are some of the key implications:

what is the New lease standard’s Potential impact on the Construction industry?

Financial statements

The most obvious implication of this new standard is the impact on the balance sheet.  Companies will see a commensurate increase in assets and liabilities that will represent the future commitment associated with the leased asset.  The income statement impact should be minimal, as the standard only changes the classification of certain lease-related expenses, but not the overall expense recognized as compared to current GAAP.

Longer lease terms

This new standard changes the definition of the lease term to include future periods covered by options to extend that are likely to be exercised or future periods that are likely to be covered by new leases.  The impact of this change is an increase in the overall stated liability for the company on its balance sheet.

Job costing

For finance leases for assets being used on a job, management should consider the impact of recording amortization and interest expense as part of job costs. These costs represent use of an asset that results in progress towards completion, so these costs can be considered job costs in most cases.

Bank covenants

Many companies have bank covenants based on leverage ratios that will be impacted by the increase in debt recorded on the balance sheet.  Management should discuss these upcoming changes with its lenders and be transparent about its impact on the balance sheet.

There could be other implications depending on your company’s unique situation and circumstances. Keiter would be happy to discuss any of these potential impacts or to assist with implementation for your company.

Additional ASC 842 Resources:

Accounting for Office Leases under ASC 842

FASB Reissues Targeted Improvements to Leases Standard