As a government contractor, you know that cash flow is often one of the biggest things on your mind.

You are constantly juggling tight budgets, complicated cost structures, and the need to keep projects running smoothly. However, since the new lease standard, ASC 842, took effect, the way leases are reported in your cash flow statement has become… well, more complex. And if you haven’t revisited this lately, it’s time.

This post will walk you through why these lease changes matter, how they show up in your numbers, and why ignoring them could leave you blindsided or at least slightly confused when you look at your cash flow.

Why Should You Care About ASC 842?

Under the old lease standard (ASC 840), most operating leases were simple. You paid rent, you recorded rent expense, and that was that.

But with ASC 842, you are now required to show the following:

  • A right-of-use (ROU) asset on your balance sheet
  • A lease liability that tracks your future lease payments

On paper, this makes sense, with more transparency and accuracy. But here’s the thing: these changes don’t just affect your balance sheet; they also mess with your cash flow reporting.

Where Does It Show Up on Your Cash Flow Statement?

Here’s the simple version:

  • When you first set up the lease (ROU asset + liability), it’s a non-cash transaction. No money is moving, so it doesn’t show up in your cash flow statement. But you do need to disclose it in the supplemental non-cash section.
  • Over time, the ROU asset is reduced and amortized, which is reflected as an adjustment in operating activities, similar to depreciation.
  • Your lease paymentsreduce the lease liability; however, for operating leases, those cash outflows still appear in the operating section, not the financing section.

The bottom line is, even though you now have a lease liability on your books, it does not change where the cash goes in your statement of cash flows.

This can surprise many companies. You would think, “Hey, liability reduction, shouldn’t that hit financing?” But ASC 842 keeps it firmly in operating cash flow.

Why This Matters (More Than You Think)

Here is where it gets real for contractors:

Cash Forecasting

If you are forecasting cash using only the P&L or budget-to-actuals, you might miss the hidden lease payments embedded in the cash flow. That can throw off your liquidity planning.

Loan Covenants

While operating lease liabilities are not counted as debt under most loan agreements, they can still impact your leverage ratios and cash flow metrics, especially if lenders adjust for them in their models.

Contract Pricing & Compliance

If you’re allocating occupancy costs to indirect pools for contract pricing, you want to make sure you’re reflecting lease costs properly under the new standard. Otherwise, you might be leaving money on the table (or worse, misallocating costs).

Stakeholder Reporting

When your balance sheet balloons with new lease assets and liabilities, but your cash flow doesn’t change, it can raise questions from your board, auditors, or even contracting officers. Are you ready to explain the optics?

Some Practical Tips (From the Trenches)

Communicate with Your Team

Make sure your accounting, FP&A, and contract management folks are all on the same page about how these lease flows work. It’s not just an accounting issue; it’s a business operations issue.

Model It Out

Before you sign, renew, or modify leases, model the full financial impact, not just on the income statement, but also on cash flow and balance sheet optics.

Communicate Clearly

Whether it’s your leadership team or your lenders, don’t assume everyone understands ASC 842. Sometimes, a simple, clear one-pager or dashboard can go a long way.

Final Thought

ASC 842 isn’t just about ticking an accounting compliance box. It’s about truly understanding how leases flow through your business, especially when cash is tight, and every dollar counts.

To stay ahead in government contracting, understanding your cash flow is essential, and leases play a significant role in that narrative. So, the next time you’re examining your financials, don’t just skim the surface. Explore the details. Understanding where your money is going allows you to make smarter, more confident decisions.

 

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