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The time is now for construction companies: examining the complexities (and urgency) of the new lease standards

Leaders of construction companies likely have been aware of the new lease accounting standard, ASC 842, for several years. The implementation of the topic has been delayed by the Financial Accounting Standards Board (FASB) multiple times, most recently because of the pandemic. However, it is evident that now is the time to familiarize yourself with the new lease standard.

With ASC 842 presenting several challenges, many of which we will discuss below, it is important to start understanding the complexities of the topic. Perhaps most importantly, it is pivotal to determine whether or not you need professional assistance with the guidance.

In this article, we are not doing a deep dive into the technical aspects of ASC 842, but just for a quick overview, ASC 842 Leases:

  • Requires lessees to recognize assets and liabilities on the balance sheet for most leases (including operating leases) and has enhanced disclosure requirements
  • Requires entities that have not adopted ASC 842 to adopt for annual periods beginning after Dec. 15, 2021, and interim periods in annual periods beginning after Dec. 15, 2022
  • Requires lessees to utilize a discount rate when recognizing those leases on the balance sheet

A typical ASC 842 transition is applied using a modified retrospective approach, which includes application of concepts from both ASC 840 and ASC 842 to leases that existed before the effective date. A cumulative effect adjustment may be necessary, depending on the which practical expedients the company elects.

Who is impacted by ASC 842?

Some construction leaders may find themselves skeptical of ASC 842 for reasons that have nothing to do with the standard. Previously, ASC 606 presented itself as an impactful topic in revenue recognition, only to have many companies go through the process to ultimately determine that there was not a significant impact on their organization and the way they conduct business.

However, that will not be the case with ASC 842. Virtually every company (including your construction organization) with leases having terms of more than 12 months will face a financial impact of some kind as a result of ASC 842.

While implementation of ASC 606 was technically challenging from an accounting perspective, ASC 842’s challenges come largely from outside of technical accounting. Gathering data and process documentation are two of the complex areas in ASC 842.

The time is now

One of the most important elements to discuss surrounding ASC 842 is the urgency to act. While some companies may choose to implement ASC 842 during the year-end close process, that delay could be a major mistake.

The main reason for this is because of the number of companies and entities that will be impacted and the anticipated likelihood of capacity problems, whether they are internal capacity concerns as your company approaches its year-end, or external capacity concerns as you seek a team of CPAs to handle your lease-related accounting. Additionally, companies will need to evaluate the impact of implementation to the users of the financial statements (i.e., lenders, sureties, stockholders, etc.).

With this in mind, our advice is to start the ASC 842 process as soon as possible, whether that is gathering info internally, well in advance of your organization’s year-end review or audit, or hiring a CPA firm to oversee the gathering of data and ultimately to handle the ASC 842 work.

The other timing element involved here is the number of hours it takes to gather all the necessary contracts and amendments and speak with the right people before the accounting part of the process can commence. Construction companies sometimes envision the early procedures being swift and smooth, but based on our experience, we caution you that the preparation for ASC 842 will take longer than you anticipate.

ASC 842: The key challenges

Construction companies face a long list of potential challenges when it comes to ASC 842 preparation and implementation. Fortunately, Baker Tilly has experience providing solutions in each of these key areas:

  • Incomplete and/or inaccurate data – Sometimes lease data is not available, or is found to be incorrect, or the information gathering process has not even begun, resulting in a lack of data at the moment.
  • Company capabilities – This challenge encapsulates companies that do not have the necessary people, processes or technology to handle ASC 842 implementation on their own.
  • Accounting policy elections – In the cases of many companies, their personnel lack the appropriate technical accounting expertise, or the organization lacks the necessary change management process to facilitate a smooth implementation.
  • Day 2 accounting – Some organizations have software that requires repeated re-configuration or manual workarounds or other accounting issues such as lease modification and termination accounting, or no standardization in the lease set-up and journal entry process.
  • Disclosure – The new standard requires qualitative and quantitative disclosures that are more robust than the former standard.

We highlighted our recommendations for addressing each of these challenges during our recent ASC 842 webinar.

What leasing tools should your construction company use?

There are two major decisions to be made at the outset of the ASC 842 process. The first is whether your construction company is going to do the implementation internally, or whether it makes more sense to hire an external firm like Baker Tilly to do the heavy lifting. The second is whether you want the calculations to be done in Excel, or a leasing software tool. Baker Tilly has experience and connections with the leading software platforms and providers. We regularly assist clients across many industries with determining what tool makes the most sense for them. We discussed the tool options in greater detail during our recent webinar.

How Baker Tilly can help

Given the confusing nature, relative urgency and heavy financial impact of ASC 842, Baker Tilly’s specialists have the technical capability to assist companies with every step of an ASC 842 implementation. We help clients who require a complete outsourcing of the project; they acquire the lease documents and then Baker Tilly takes it from there. In other cases, Baker Tilly simply provides guidance as needed for clients who require consulting to ensure their implementation goes as accurately and efficiently as possible.

To discuss how Baker Tilly can assist your construction organization with ASC 842, feel free to contact us.

Andrew N. Dilling
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