After several years of proposals and deliberations, the Financial Accounting Standards Board (FASB) has issued its new accounting standard - a long-awaited regulatory update that will change the way that leases are reported on company balance sheets.
For contractors, operating leases - including real estate, vehicles, equipment, and other assets - are an integral part of everyday operations. In my recent article in Professional Contractor Magazine, I discussed the impacts of this new regulation on the construction industry. Below, I've answered the top 5 questions I've been asked by contractors about this new regulation.
1. When do the new rules take effect?
The new standard will go into effect for public companies with fiscal years beginning after December 15, 2018 (December 15, 2019 for all other companies).
2. Will this impact our daily operations?
It's possible, especially if your company has substantial lease contracts. Under the new regulations, you'll need to add both assets and liabilities for any leases to your financial statements. This not only impacts your balance sheet, but also your working capital, debt to equity ratio, and debt service ratio. In many cases, these ratios are used to determine bonding capacity - or the size of the job you can bid on - which could impact your daily operations.
3. Should I buy my assets now, instead of leasing?
It's definitely worthwhile to consider whether it is more economical to lease or buy certain assets under the new circumstances, especially if you have an "end of term" decision coming up. Under the new regulation, only leases of 12 months or more are required to be reported, so you may also want to consider changing the terms of your leases moving forward. Leases that qualify as a service are also not required to be reported, so you'll need to look closely at your contracts to determine how the new regulations will impact your company.
4. What is the cost to comply with the new regulations?
If your company has a large lease inventory, you may need additional resources to track, evaluate, and maintain your contracts - either in the form of technology or additional staff.
5. How can I prepare?
The best way to prepare is to plan ahead. Review all of your equipment and asset lease and rental contracts, and create an inventory list, including contract terms and dates, as well as any associated costs, including rent, interest rates and security deposits. Review your current procurement processes, resources, and technology, and think about whether you might need additional resources in order to comply.
If you have questions or concerns about the new lease standard, talk to an expert - your CPA or advisor can help you evaluate your current lease portfolio and recommend a plan for successful compliance. To learn more, read my recent article in Professional Contractor Magazine, leave a comment below, or feel free to reach out to me directly.