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, now is the time to familiarize yourself with the new lease standard.
With ASC 842 presenting several challenges, 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.