Chris Hartle, a senior manager at Barnes Dennig and the leader of the firm’s construction client service team, published a white paper detailing the proposed changes to lease accounting, in the wake of the FASB/IASB convergence efforts. For contractors who finance heavily through operating leases, the changes are expected to create an increase in assets but a greater increase in liabilities and financial leverage.
In the current economic climate, contractors are fighting for every project they get. Many have lowered margins, reduced overhead or moved to a new geographic area in an attempt to weather the storm. Some will soon face another challenge: a rising debt-to-equity ratio that may make it more difficult to obtain bonding and financing.
Due to the impact of the lease accounting changes, we will likely see lessees desire shorter term leases to reduce both the increased leverage and the impact of the increase in first-year lease costs. Lessors may be inclined to charge a higher price on leases to offset the additional risk they would be subjected to with shorter term leases.
The full article can be found at barnesdennig.com/publications. The changes are not likely to become effective until 2012, so there is time for contractors to prepare for them and possibly reduce their impact.
For more information on the FASB/IASB convergence, register for Barnes Dennig’s Accounting & Auditing Update Seminar on December 8, featuring Barnes Dennig director Tom Groskopf.