Recent changes in accounting standards will have a big impact on construction accounting. Accounting Standards Codification 842 (ASC 842) was implemented in December 2018 for public companies, and private companies must transition to this standard by January 1, 2021. Going forward, construction companies must carefully review their contracts for hidden leases and change their lease accounting practices.
What is a Hidden Lease?
A hidden lease is a portion of a contract that does not appear to be a lease but, under the new accounting standards, is nevertheless considered a lease. Hidden leases are typically found in a contract between a company and a service provider and refer to the control of an asset that will be used to provide a service to the company.
The wording of the contract determines whether there is a hidden lease. If the contract states that the service provider in question can interchange one asset for another, then it is not a lease. If the contract gives the company the right to control a specific asset to provide the service, then it is considered a lease.
For example, your construction company may enter a contract with a materials supplier to deliver supplies to your construction site. If the contract specifies that the supplier deliver those supplies using specific trucks, then that portion of the contract is considered a hidden lease. Many standard contracts may now contain hidden leases.
The Importance of Hidden Leases for Construction Companies
ASC 842 will impact construction companies in several ways. Construction companies typically lease space and equipment to run their businesses, including office space, construction equipment, fleet vehicles, and trailers for job sites. Under the new standards, construction companies will have to change their accounting treatment for most of these leases.
Implementing ASC 842 will require construction companies to critically review their leases and other contracts, including contracts for service, supply, transportation, and IT support. Changes in record keeping and financial statement disclosures will also be required.
Accounting Standards Solutions
Your business may need to implement new solutions to meet changes in accounting standards. Work closely with a CPA to make sure your business is compliant with ASC 842.
The consultants at MKS&H work hard to help businesses meet their goals and more. If you are concerned about how ASC 842 will impact your construction accounting, reach out to us today for a consultation.