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After many years of delays, ASC 842 – the new lease accounting reporting standard went into effect on January 1, 2022, for private companies with a calendar year-end. By the end of this year, companies will need to report most operating leases on their balance sheets as liabilities and corresponding assets, rather than only in the notes of their financial statements.
While the lease accounting standard applies to all companies, it may have unique ramifications for construction companies that rent equipment, scaffolding, office trailers, etc., for specific job sites for more than 12 months. If your construction company has not yet started complying with the new standard, the most important message right now is to get started as soon as possible.
Complying with the new lease accounting standard will require compiling an inventory of your company’s lease obligations before properly calculating the assets and liabilities they represent. This may be more complicated than it sounds.
Most of your leases will be obvious. Office space and office equipment such as photocopiers and even coffee makers may be among the leases that first come to mind as you tackle the lease inventory project.
Leases You Might Overlook
As mentioned above, companies can also have non-standard leased items. Some examples for construction contractors are rented scaffolding, rented jobsite trailers, fleet vehicle arrangements and rented heavy equipment, some of which may be under multi-year lease arrangements.
ASC 842 generally defines leases to include agreements that convey the right to control the use of a specified asset for a period of time, in exchange for consideration. An agreement need not be called a “lease” for ASC 842 to apply.
For instance, if a construction company contracted with a supplier to provide a water truck at a job site for more than 12 months and under the contractor’s direction, the supplier used a dedicated water truck to fulfill the contract, it may be viewed as a lease under ASC 842. The key factor here is control, meaning the right to direct an asset’s use and to obtain substantially all the economic benefits arising from that use.
Information technology contracts often hold embedded leases, particularly if they include a requirement for using a dedicated server to satisfy a customer’s security concerns. Certain cloud-based software subscription agreements also may be subject to ASC 842 reporting.
Take the First Steps
To start the process of complying with ASC 842:
- Compile a list of your lease agreements, sublease agreements and any contracts that may include embedded leases.
- Build a spreadsheet of these leases, including data on the lease terms and a clear description of the right of use asset.
- Contact your surety agent and your bank to discuss the impact of the new financial reporting standard. It will not affect your company’s revenue, but it may impact certain financial ratios that are considered by lenders and sureties.
- If you have more than 10 or 12 leases, talk to a JLK Rosenberger team member about whether lease accounting software may help with the initial calculations of the liability and asset data, and with ongoing lease tracking.
We’re here to help
Complying with ASC 842 will require careful analysis of existing leases and ongoing tracking of new lease agreements. It will look different in every company, based on the mix of leases. If you have questions about starting the compliance process in your organization, JLK Rosenberger can help. For additional information, call us at 949-860-9890, or click here to contact us. We look forward to speaking with you soon.