Back in November 2019, the FASB issued Accounting Standards Update 2019-10: Financial Instruments – Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842) which delayed the effective date of previously issued ASUs for all three areas. As a result, the new lease standard will now be effective for your December 31, 2021 audits, reviews, compilations, etc.
For a quick refresher on the lease standard, take a look at a previous article written by Trevor Warren that details Our Thoughts On the lease standard and its impact to the construction industry (click here). This article serves as a reminder that this standard will likely have an impact on your financial statements, related ratios and how the users interpret those results.
While the accounting for this new lease standard has been delayed until January 1, 2021, do not procrastinate in evaluating the impact of this new accounting standard on your company. To provide a quick recap of just how impactful this standard has been, I reviewed the most recent quarterly filings for five, large, public construction companies (Companies A through E below). The results shown below paint a strong picture of how impactful this new accounting standard can be to your balance sheet.
|
Company |
|||||
|
A |
B |
C |
D |
E |
|
|
Working Capital Decrease |
$72m |
$52m |
$42m |
$12m |
$43m |
|
Lease Liability Increase |
$294m |
$246m |
$243m |
$43m |
$69m |
|
% of Balance Sheet |
3.73% |
5.43% |
4.50% |
0.96% |
6.55% |
Things to Consider
- Does your banker know that your lease liability/debt on the balance sheet is going to increase?
- Does your surety know that your working capital is going to decrease?
- Is anyone at your Company aware that your overall balance sheet might increase, potentially within a range of 1% – 6%?
- Do you know if this change will impact your covenant compliance?
- Do you have a good inventory of all your leases?
- Have you reviewed your contracts for embedded leases arrangements?
- Have you quantified what your entry might look like and how it will change your balance sheet?
The FASB has given an extra year for all private companies to assess this new standard, in part, due to challenges companies have encountered in their analysis of this new standard. If you have not begun these discussions or are having trouble answering these questions, now is the time! If you encounter any difficulties as you begin your analysis, let us know and we can help, either through consultation or through simpLEASE, a lease accounting software that we have developed.
