Six Tax and Surety Considerations for
the New Lease Accounting Standard
As published in CE This Week on October 18, 2018
Matthew Boland, CPA
Focused on You. Dedicated to Your Success.
November 19, 2018

Most organizations are busy preparing to adopt the new lease accounting standard (ASU No. 2016-02, Leases. Topic 842) issued by the Financial Accounting Standards Board in February 2016. This ASU becomes effective for fiscal years beginning after Dec. 15, 2018, including interim periods in those fiscal years, for any of the following: 
  • A public business entity; 
  • A not-for-profit entity that has issued, or is a conduit bond obligor for, securities that are traded, listed or quoted on an exchange or an over-the-counter market; and 
  • An employee benefit plan that files financial statements with the U.S. Securities and Exchange Commission. 

For all other entities, the new lease accounting standards are effective for fiscal years beginning after Dec. 15, 2019, and interim periods within fiscal years beginning after Dec. 15, 2020. Early application of the standards is permitted for all entities.

In his article entitled Six Tax and Surety Considerations for the New Lease Accounting Standard published in Construction Executive (CE) This Week on October 18, 2018, Matt Boland provides valuable insight on how the ASU will impact a company’s: 
  1. Balance Sheet: Lease obligations generally increase assets and liabilities. Higher liabilities may make it difficult to obtain bonding. 
  2. Financial Ratios: A contractor’s working capital ratio and debt-to-equity ratio may be pushed above the acceptable threshold. The contractor may no longer be in compliance with bond agreements or covenants. 
  3. Expense Recognition: Capital leases typically result in accelerated expense recognition for financial statement purposes under the ASU. Operating leases have a constant annual cost. The right-of-use cost can generally be amortized over the lease term on a straight-line basis. The lease liability is based on an effective interest rate calculation. 
  4. Sale and Leaseback Transactions: Real estate transactions may qualify for sale and leaseback accounting. Contractors should take this into account when contemplating tax planning strategies as a source of taxable income to support future deferred tax assets. 
  5. Taxable Income and Deductions: Contractors may have to recognize deferred assets and deferred liabilities in reporting excess on right-of-use assets and the related lease liabilities according to generally accepted accounting principles. 
  6. Valuation Allowance: Changes recorded in deferred tax assets and liabilities, as well as how book-to-tax differences are reversed under the ASU. A contractor’s valuation allowance and net operating loss carryforwards can be impacted. 

There are many other factors contractors must consider regarding the ASU, such as the tax implications of leverage leases; state sales and use taxes, franchise, net worth and other non- income-based taxes; and interest expense, personal property or real estate taxes and transfer pricing.

You can read the article by clicking here .

As always, feel free to contact any member of our team at 610-828-1900. Matt Boland, CPA and director of accounting and assurance, can be contacted at Matthew.Boland@MCC-CPAs.com . Or, you are more than welcome to reach out to me at Marty.McCarthy@MCC-CPAs.com . We are happy to help. 
Martin C. McCarthy, CPA, CCIFP
Managing Partner
McCarthy & Company, PC

Disclaimer This alert is for informational purposes only and does not constitute professional advice. Information contained in this communication is not intended or written to be used as tax advice, and cannot be used by the recipient to avoid penalties that may be imposed under the Internal Revenue Code. We strongly advise you to seek professional assistance with respect to your specific issue(s).