As published in ENR 10/2/23, authored by Mike Karlins, CPA, CRIS, Senior Client Advisor, American Global

After years of discussion, revisions and a pandemic-induced delay, the Financial Accounting Standards Board (FASB) finally brought the new lease accounting rule, ASC 842 (Accounting Standards Codification 842), to the forefront.

Prior to the implementation of ASC 842 (which became effective for private companies in years beginning after December 15, 2021), lease accounting required companies to classify leases as either operating or capital. Operating leases were not recorded on the balance sheet, which led to the potential understatement of a company’s liabilities and overstatement of its financial performance.

ASC 842 aims to address those issues and achieve the four following objectives:

  • Increased Transparency: Under ASC 842, both operating leases and finance (capital) leases are required to be recognized on the balance sheet, enhancing transparency, and ensuring that financial statements more accurately reflect a company’s financial position and obligations.
  • Improved Comparability: The standard’s more consistent methodology provides a better framework for recognizing and measuring lease assets and liabilities, which allows stakeholders to better compare financial information across companies in the same industry.
  • Improved Risk Assessment: With a more comprehensive view of lease obligations, sureties can better assess a firm’s financial risk and its ability to handle lease-related expenses.
  • Enhanced Decision-Making: With lease obligations explicitly stated on the balance sheet, investors, creditors and other users of financial statements can make more informed decisions about a company’s financial health, its ability to meet future lease payments, its capacity to complete projects and its overall lease-related risk exposure.

The question for the construction industry is, then, with these changes, do surety underwriters now view a contractor’s financial statements differently? After speaking with staff experts and several underwriters from the surety industry, the answer appears to be a resounding “no.” Many stated that footnotes to financial statements included future lease payments, therefore, surety underwriters were already including those figures in their analysis of short-term and long-term obligations.

So, while for some industries the implementation of ASC 842 may have been significant, for contractors, the new lease accounting rules were a non-event, more optical than substantive. Sureties seem to have taken the position that there has been no change in the contractor’s business, so why should our underwriting change?

About American Global

American Global is one of the largest privately held insurance and surety brokerage firms in the U.S., specializing in all aspects of construction risk management. They support contractors, owners, and developers throughout the entire scope of their project and across every milestone of their business, protecting against the risks and exposures specific to the construction industry. American Global has multiple offices across the United States, as well as in Canada, England, and Italy, to serve clients throughout North America, Latin America, the United Kingdom and Europe.