Engineering & construction industry podcast series: Part three
Impact of proposed lease accounting rules on E&C companies
Current lease accounting is considered to be broken, most significantly for lessees. The method is complex and the dividing line between operating and finance leases is a "bright line" rule rather than being principles-based. Users believe operating leases give rise to assets and liabilities that should be recognized in the financial statements of the lessee. The existence of two very different models — operating v. capital leases — means similar transactions can be accounted for in different ways, reducing comparability.
The new proposed lease accounting rules aim to eliminate off-balance sheet accounting. Essentially, all assets currently leased under operating leases will appear on balance sheets under the new proposal. The recognized asset/liability will be based on estimated expected lease terms and payments, not contractual minimums. Additionally, the proposal requires an ongoing re-measurement of estimated term and cash flows.
In addressing these proposed rules, PwC LLP's Engineering & Construction practice has released a new podcast to outline recent updates relating to the FASB/IASB joint lease project as well as the business and systems implications it has on engineering and construction companies.