Changes to Lease Accounting Standards Could Affect Construction Industry

Proposal would change how leases are accounted for on corporate balance sheets

A majority of U.S. companies across a wide spectrum of industries lease equipment and real estate as part of their day-to-day operations. Currently, operating leases are not reported on companies’ balance sheets; they are typically included in the footnotes of companies’ financial statements. As part of the global effort to establish uniform corporate financial accounting standards, the Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB) issued a proposal for a new lease accounting standard on May 16, 2013. The Boards’ intent is to record these transactions on balance sheet (i.e., capitalize all leases with lease terms of more than one year on lessees’ books).

Video: Lease Accounting Proposal Concerns Businesses

As an asset intensive industry, the construction industry would be heavily impacted by the proposed changes to lease accounting.

What the Construction Industry Needs to Know About Changes to Lease Accounting

Under the proposal, the present value of the lease rents will be recorded by the lessee as an asset and liability. The profit-and-loss pattern will not represent the economic nature of a rental agreement, as lease expense will be front-loaded. This will increase the cost of leasing in the early years of the contract and will not match the periodic rental payments under the lease. 

Lease pricing may rise due to the deferral of profits in sales-type lease accounting for lessors.