As a construction business owner, navigating the financial intricacies of your industry can be daunting. Between managing contracts and tracking new regulations, the shift from ASC 840 to ASC 842 in lease accounting standards may seem like just another complexity. However, understanding these changes and their implications is key to ensuring your business’s financial stability and growth.

As of 2023, the Accounting Standards Codification (ASC) 842 replaces the old ASC 840, marking a critical turning point for private companies. The change mandates that all leases, whether capital (now termed financing leases) or operating, be recorded on the balance sheet. This transition enhances financial transparency, bringing previously “off-balance-sheet” operating leases into the spotlight and impacting key metrics on your financial statements.

Understanding the new terrain means focusing on two key financial metrics: the Debt Service Coverage Ratio (DSCR) and Working Capital.

• DSCR: This ratio measures a firm’s ability to cover current debt obligations with its available cash flow. Under ASC 842, DSCR may decrease, signaling a potential inability to service existing debts. This could influence lenders’ or other stakeholders’ perceptions of your financial stability.
• Working Capital: This metric represents your available operating liquidity, calculated by subtracting current liabilities from current assets. While positive working capital is generally a good sign, the new standard might decrease this figure, potentially impacting your bond limit.

The impacts of ASC 842 could pose substantial risks for construction businesses, particularly for heavy contractors leasing equipment and those leasing long-term real estate.

Despite the potential challenges, the introduction of ASC 842 also brings opportunities for strategic planning and optimization.

• Open Communication: Should your business rely on significant operating leases, connecting with your Certified Public Accountant (CPA), surety bond broker, and bankers is crucial. Open conversations about potential impacts will enable the development of effective strategies to minimize potential financial disruptions.
• Strategic Planning: ASC 842’s introduction presents an excellent opportunity to reassess your company’s lease obligations. With your financial advisor, consider renegotiating leases, purchasing assets, or finding another optimal structure aligning with your business goals.
• Staying Ahead of Industry Trends: New regulations bring shifts in industry trends. You can maintain a competitive edge by understanding these changes and adjusting your strategies accordingly.

The transition to ASC 842 presents challenges. However, it also offers a pivotal moment to reassess your financial health and strategies. With a proactive mindset and the right approach, these changes can serve as building blocks for your construction business’s continued success, ensuring you can continue building solid physical and financial foundations.