By Joshua R. Lorenz, Construction Law Group Vice Chair
Private companies are likely to get a year-long reprieve from implementing new standards that will significantly change how leases are presented on financial statements, bringing a sigh of relief for many in the construction industry (and plenty of others) who may have been slow to adhere to the coming, potentially disruptive changes.
The Financial Accounting Standards Board (FASB) voted in July to propose delaying the effective dates for a set of accounting standards, potentially bumping back the effective date for the new lease standards on companies that are not public business entities one year to financial periods beginning after Dec. 15, 2020 (Jan. 1, 2021 for calendar-year-end companies) and for interim periods between fiscal years beginning after Dec. 15, 2021 (Jan 1, 2021 for calendar-year-end companies). The board could finalize the proposal as early as the fall. Early adoption of the standards will be allowed, however.
Announced in 2016, the new accounting standards are aimed at making a “more faithful representation of a lessee’s rights and obligations arising from leases,” according to the FASB. The board said the previous standards failed to meet the needs of the users of financial statements because they did not require lessees to recognize assets and liabilities from operating leases on their balance sheets. The main thrust of the new standards, then, is to ensure lessees recognize all assets and liabilities created by leases with terms of more than 12 months.
The instant impact for private business owners in the construction industry is it gives more time to understand and implement these new measures before being caught off-guard. Many contractors, subcontractors, managers and related businesses in the construction industry have assets that will be affected by the new standards — but they might not know it.
Open a business, and you likely won’t be buying everything with straight cash. That certainly holds true in construction, with businesses leasing all manner of sophisticated equipment, vehicles, trailers used for offices, real estate and countless other assets. Over years, these leases accumulate, some end, some are re-leased, and others are purchased. It’s surprisingly easy, without steadfast bookkeeping, to lose track of how certain assets are classified, especially if they’ve never been included as part of the balance sheet before.
If owners have been managing their finances through lines of credit or other financing, these new standards could shake up some businesses from a cashflow perspective. Current procedures may lead to tax liabilities or fines in the future, so they should be reexamined. That makes the present a good time for business owners and their financial and legal partners to review the new standards, audit how they will directly affect their reporting practices and make a plan as to how to apply them moving forward. The earlier they can do so, the better.