“Though many contractors are aware of the upcoming changes to lease accounting, many are unsure of how to transition to the new accounting standard, known as Accounting Standards Codification Topic 842 (ASC 842),” was Ralph Petta’s assessment of the readiness of construction companies to comply with the new rules for lease accounting in a recent report.
The Financial Accounting Standards Board (FASB) approved these rules, which will be effective for financial periods starting after Dec. 15, 2018, for public companies, and after Dec. 15, 2019, for private companies.
Petta is the president and chief executive of the Equipment Leasing and Finance Association (ELFA), the trade association that represents companies in the $1 trillion equipment finance sector.
To deal with the new workload, he advised construction companies to make an inventory of equipment and real estate leases, and keep them in an electronic repository to make them accessible for retrieval, analysis and revision.
“This will help determine whether the organization should elect either of the two available practical expedients that must be applied consistently to all leases. This determination will apply not only to reporting existing leases and other agreements during the transition phase, but also determine future accounting policy decisions,” Petta explained.
He added that firms make an “if/then” analysis to determine whether to adopt the expedients outlined in the new rule.
Moreover, he said to prepare the company’s IT infrastructure to handle the additional demands that will emerge from the adoption of the new rule.
“Assess the organization’s existing IT structure and whether it can handle issues such as data extraction, information and document storage, and the reporting requirements of the new standard,” Petta further advised.
Companies must also identify gaps in performance and abilities to be able to address them with plenty of time before the reporting requirements begin.
“Assess existing lease accounting policies, procedures and controls, and perform a gap analysis to determine which require changes. Determine which options to follow to reach the desired future state of tracking and financial reporting for agreements subject to (the new rule),” he concluded.
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