Changes To Financial Statement Presentation For Leases

As businesses navigate through evolving financial regulations, understanding the changes in financial statement presentation becomes crucial. The upcoming revisions to lease accounting standards, effective from 2022, signify a significant transformation for companies across various industries, including construction. 

These changes will require all long-term leases to be reported directly on balance sheets, introducing a fundamental shift in financial reporting practices. 

Our latest video looks at these modifications, providing expert guidance on how companies can adapt to this new accounting landscape, ensure compliance, and maintain fiscal stability amidst these regulatory changes.

Financial Statement Presentation: Changes to Lease Reporting

Hi, contractors. Kristen Bailey here, CPA and certified construction industry financial professional for KatzAbosch, a CPA and consulting firm that specializes in construction contractors. This month we’re talking about the change in financial statement presentation releases, and this is a change that will affect all companies, not just construction contractors. 

Starting in 2022, next year, all of your long-term leases will be required to be reported on the balance sheet as a liability, and there will be an offsetting asset. Currently, there are two classifications of leases. You have capital leases that are on your balance sheet as a fixed asset and a lease liability, and then you have operating leases. 

And these do not get reported on your balance sheet at all. You just expense the rental payments as you pay them.

The goal of this change is to have all future monetary commitments reported on the balance sheet and not to have some buried in the footnote. Although the net equity effect of this change is going to be zero, it could have a pretty big impact on some debt covenants, especially the debt to equity calculation. 

A significant amount of debt might be added to your balance sheet in the form of this new lease liability, but your equity—because the debt is offset by the asset—your equity will be unaffected. So, your debt to equity percentage will increase.

This is a common loan covenant calculation for line of credits. If you’re looking for an estimated amount of debt to be added to your balance sheet, you want to check out your operating lease footnote. This footnote details the commitment by year for your future lease payments. 

When we go to add it to your balance sheet, that amount will be present valued, so it will be reduced, but this will give you a good starting point to see, you know, how much debt will be added to your balance sheet starting in 2022.

You also want to watch out for related party leases, just because they’re month-to-month, i.e., short term leases, doesn’t mean they’ll be excluded from this change. We’re still doing some research and waiting on further guidance as to the proper treatment of month-to-month related party leases. 

The change gets really complicated and nuanced when it comes to reducing your asset and lease liability every month. 

As always, you can always reach out to us at KatzAbosch if you have any changes or any questions related to this change. We will have more guidance on this as we get closer to the implementation date, but we just wanted to make sure this was on your radar, especially if you have a debt to equity covenant in your line of credit documents. 

So, again, please reach out to us if you have any questions. Have a great day, and we’ll see you next month.

Mastering Financial Statement Presentation with Lease Accounting Changes

The transition to new lease accounting standards is pivotal for ensuring accurate financial statement presentation and compliance across industries. This fundamental shift, highlighted in our latest video, requires a comprehensive understanding of how these changes affect your financial reports.

If you’re seeking strategic advice to master these adjustments in your financial statement presentation or need assistance to ensure your reporting aligns with the new regulations, don’t hesitate to reach out. Our experts are ready to help you navigate these changes, offering tailored guidance and support to maintain your company’s financial clarity and compliance.

Contact us today for expert assistance with your financial statement presentation needs.