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Understand the Reporting Change to Leases Before 2021 Ends
By Michael Turturro
As a part of daily operations, most contractors have leased vehicles, buildings, trucks, construction equipment or other items to keep costs down and business running smoothly.
Did you know that, in a matter of months, your leases will be accounted for differently due to the new lease accounting standard?
While previously only capital leases were recorded on the balance sheet, effective for fiscal years beginning after December 15, 2021, all leases will be on the balance sheet. That translates to January 1, 2022 for calendar year entities, and fiscal 2023 for non-calendar year end entities. What does this mean moving forward? It means contractors need to make sure they have a thorough handle on all of their leases. Now is the time to review and evaluate contracts.
New definition of a lease
The new definition under ASC 842 says, “a contract, or part of a contract, that conveys the right to control the use of identified property, plant, or equipment (an identified asset) for a period of time in exchange for consideration.” This slight change means that all contracts should be evaluated to determine if they fall within the scope of this new criteria. Contracts that were previously considered leases may no longer meet the lease criteria and vice versa. Be mindful of lease language when you are reviewing your contracts.
Two categories of leases
The leases formerly known as capital will now be called finance leases. The classification criteria remain essentially the same as under the existing standard; the only major difference is the elimination of the bright-line percentages. All leases that do not meet one of those criteria will be classified as operating.
If a lease contract includes a non-lease element, that non-lease component must be accounted for as a separate contract distinct from the lease itself. For example, the cost of an equipment lease that includes a maintenance contract must be allocated between the two elements and accounted for separately.
Lease liabilities for operating and finance leases will all be accounted for in the liability section the same way capital leases currently are: split between current and long-term. The offset to the liability will be a right of use (ROU) asset. There will be two lines: a ROU asset - operating lease line, and a ROU asset - finance lease line. These ROU assets are all long-term.
The new standard was designed so that there should be minimal impact to your income statement. Operating leases will continue to be recognized as a straightline expense over the life of the lease. Finance leases will continue to be frontend loaded because the interest is higher at the beginning of the lease than at the end.
Michael Turturro, CPA, is a Managing Partner with RBT CPA’s and in charge of the firm’s Technology Committee. He can be reached at 845-567-9000 Ext. 236 or at mturturro@rbtcpas.com
Important impact
The most significant impact will be on the company’s current ratio. Because the ROU assets are all long-term but the lease liability is split between current and long-term, the current ratio will be negatively impacted. This change will be particularly important for entities with debt covenants that reference the current ratio. If you have significant operating leases that may create an issue with your debt covenants, connect with your bankers now and make sure that they are aware of the new standard.
Key to know
Ultimately, it’s important that both the borrower and the lender understand that this is a reporting change, not a change in a company’s financial situation. Having this conversation early on instead of waiting until the last minute will avoid confusion, and a lot of headaches. If you’d like to get a head start so you aren’t scrambling to figure out the logistics once January arrives, the time to act is now.
SUPPORT FOR LABOR UNIONS AT HIGHEST MARK IN HALF A CENTURY
By Barry Lewis, Vice President of Communications for CCA
Even as the U.S. grapples with the coronavirus pandemic and economic conditions in the U.S. remain tenuous, American’s support for unions is at its highest percentage in over 55 years. Sixty-eight percent of Americans approve of labor unions, according to a recent Gallop poll.
That’s the highest percentage Gallup has recorded since 1965, when 71 percent of Americans said they approved of labor unions. It’s a slight uptick from recent years, and far above the all-time low 48 percent mark from 2009, during the Great Recession.
Union approval increased among nearly all demographic subgroups since 2016, except among union members, whose approval fell to 86 percent from a recent high of 93 percent in 2019.
Gallup found that 90 percent of Democrats approve of unions, the best mark in two decades. Two-thirds of independents and 47 percent of Republicans approve of unions, the highest percentage in recent years, according to the poll. In 1953, when overall approval reached the all-time high of 75 percent, Democrats’ approval was 79 percent and Republicans’ approval was 64 percent.
Previous Gallup data have found that while Americans largely think unions help their own workers, they are less inclined to say they are helpful to
Democrats, Republicans have moved further apart in views of labor unions
% who say labor unions have a positive effect on the way things are going in the country
Source: Survey of U.S. adults conducted July 8-18, 2021 PEW RESEARCH CENTER
the U.S. economy overall. As such, support for unions has been weaker during challenging economic times.
Americans’ continued high approval of unions may result from a current focus on issues other than the economy. Generally, when economic indicators have been negative, the economy has been viewed as the most important problem facing the nation, but that is not the case now. The public is divided in its assessments of the biggest U.S. problem, with roughly one in five each citing the coronavirus, the economy, race relations and leadership.
The percentage of American workers who belong to a labor union has declined in recent decades, despite a slight uptick last year amid the pandemic. In 2020, 10.8 percent of wage and salary workers ages 16 and older belonged to a labor union, down from 13.4 percent in 2000, according to the Bureau of Labor Statistics.
Six-in-ten U.S. adults say the large reduction in the percentage of workers represented by unions over the past several decades has been very or somewhat bad for working people, while a similar share (56 percent) say it has been very or somewhat bad for the country, according to an April 2021 Pew Research Center survey.
In 2018, researchers at MIT found that approximately 48 percent of nonunion workers would join a union if they could — representing some 58 million workers and nearly half of the nonunion workforce.
Labor unions capitalized on the findings, using them to renew calls on Congress to pass the PRO Act, sweeping pro-union legislation that would make it easier for workers to organize. The PRO Act is meant to counter right-to-work laws and corporations’ aggressive anti-union campaigns that labor advocates say have contributed to declining union membership.
Gallup’s annual Work and Education poll conducted Aug. 2-17, 2021, found:
• At least 68 percent of Americans approve of labor unions, statistically similar to last year’s finding of 65 percent. The current reading is the highest since Gallup found a 71 percent approval in 1965.
• Approval has increased among nearly all major demographic subgroups since 2016, with the one exception being labor union members, whose approval has been no lower than 75 percent since 2001. Currently, 86 percent of union members approve of unions, down from the recent high of 93 percent in 2019.
• Approval is relatively high among young adults aged 18-34 (77 percent) and those with annual household incomes under $40,000 (72 percent).
• Democrats are the most approving of unions. Their latest approval of 90 percent is the highest it has been in the past two decades and up seven points since last year. Republicans’ (47 percent) and independents’ (66 percent) approval is essentially unchanged from a year ago.
% who say labor unions have a positive effect on the way things are going in the country
*Asians adults were interviewed in English only. Note: White, Black and asian adults include those who report being only one race and are not Hispanic. Hispanics are of any race. Source: Survey of U.S. adults conducted July 8-18, 2021 PEW RESEARCH CENTER
blewis@ccahv.com
