Navigating the New Lease Accounting Standards for Audit Advisers Preparing Clients for the Transition to the Joint Project Lease Reporting

Transcription

1 Navigating the New Lease Accounting Standards for Audit Advisers Preparing Clients for the Transition to the Joint Project Lease Reporting TUESDAY, JANUARY 12, 2016, 1:00-2:50 pm Eastern IMPORTANT INFORMATION This program is approved for 2 CPE credit hours. To earn credit you must: Participate in the program on your own computer connection (no sharing) if you need to register additional people, please call customer service at x10 (or x10). Strafford accepts American Express, Visa, MasterCard, Discover. Listen on-line via your computer speakers. Respond to five prompts during the program plus a single verification code. You will have to write down only the final verification code on the attestation form, which will be ed to registered attendees. To earn full credit, you must remain connected for the entire program. WHO TO CONTACT For Additional Registrations: -Call Strafford Customer Service x10 (or x10) For Assistance During the Program: -On the web, use the chat box at the bottom left of the screen If you get disconnected during the program, you can simply log in using your original instructions and PIN.

2 Tips for Optimal Quality FOR LIVE EVENT ONLY Sound Quality When listening via your computer speakers, please note that the quality of your sound will vary depending on the speed and quality of your internet connection. If the sound quality is not satisfactory, please immediately so we can address the problem. Viewing Quality To maximize your screen, press the F11 key on your keyboard. To exit full screen, press the F11 key again.

3 Navigating the New Lease Accounting Standards for Audit Advisers January 12, 2016 Derek Anderson, Managing Director VisualLease Chris Rouse, Director Windham Brannon

4 Notice ANY TAX ADVICE IN THIS COMMUNICATION IS NOT INTENDED OR WRITTEN BY THE SPEAKERS FIRMS TO BE USED, AND CANNOT BE USED, BY A CLIENT OR ANY OTHER PERSON OR ENTITY FOR THE PURPOSE OF (i) AVOIDING PENALTIES THAT MAY BE IMPOSED ON ANY TAXPAYER OR (ii) PROMOTING, MARKETING OR RECOMMENDING TO ANOTHER PARTY ANY MATTERS ADDRESSED HEREIN. You (and your employees, representatives, or agents) may disclose to any and all persons, without limitation, the tax treatment or tax structure, or both, of any transaction described in the associated materials we provide to you, including, but not limited to, any tax opinions, memoranda, or other tax analyses contained in those materials. The information contained herein is of a general nature and based on authorities that are subject to change. Applicability of the information to specific situations should be determined through consultation with your tax adviser.

5 FASB/IASB Changes Overview By Derek Anderson, MCR

6 A BRIEF HISTORY 2006 FASB and IASB launch project 2010 First exposure draft released 2013 Second exposure draft released Q New standard is published 2018 / 2019 New standard will go into effect 6

7 Lease Defined a contract, or part of a contract, that conveys the right to control the use an identified asset (the underlying asset) for a period of time in exchange for consideration. Exemptions Low value assets Leases with a term less than 1 year 7

8 FASB/IASB Overview FASB and IASB standards differ IASB = All leases are Type A (Capital) FASB = Allows for Type A and B (Operating) Requires leasees to record all leases as both Assets and Liabilities on the Balance Sheet. Includes both real estate and equipment leases. To be released Q with implementation by 2018/2019. Requires a restatement of all leases retrospectively going back three years. 8

9 FASB Type A v. Type B 1. The lease automatically transfers ownership of the property to the lessee by the end of the lease. 1. The lease contains a bargain purchase option. 1. The lease term equals 75% or more of the estimated economic life of the property. 2. The present value of the minimum lease payments at the beginning of the lease term equals or exceeds 90% of the fair market value of the property. 9

10 IASB All leases are Type A Capital Leases. 10

11 Options Options - An entity should include such an option in the lease term only if it is reasonably certain that the lessee will exercise the option having considered the relevant economic factors as with US GAAP. Reassessment - reassess the lease term only upon the occurrence of a significant event or a significant change in circumstances that are within the control of the lessee. 11

12 Variable Payments Measurement - The Boards decided that only variable lease payments that depend on an index or a rate should be included in the initial measurement of lease assets and lease liabilities and that an entity should measure those payments using the index or rate at lease commencement. Reassessment FASB/IASB remeasures if the lease liability changes for other reasons. IASB also remeasures when there is a change in the cash flows resulting from a change in the reference index or rate. 12

13 Right of Use (ROU) Presentation FASB - Present finance ROU assets and operating ROU assets as separate line items or note which line items in the balance sheet include finance ROU assets and operating ROU assets. A lessee is prohibited from presenting finance ROU assets within the same line item as operating ROU assets. IASB - Present as a separate line item on the balance sheet or disclose in the notes as ROU assets. 13

14 Liability Presentation FASB - Present finance lease liabilities and operating lease liabilities as separate line items or note which line items in the balance sheet include lease liabilities and operating lease liabilities. A lessee is prohibited from presenting finance lease liabilities within the same line item as operating lease liabilities. IASB - Present as a separate line item on the balance sheet or disclose in the notes as lease liabilities. 14

15 Cashflow Presentation Cash payments for the principal portion of the lease liability arising from finance leases within financing activities. Cash payments for the Interest portion of the lease liability arising from finance leases within operating activities. Cash payments arising from operating leases within operating activities. (FASB Only) 15

16 Example of Calculations 16

17 When does it go into effect? Companies reporting to the SEC - December 15, 2018, including interim periods within those fiscal years. For all other entities - December 15, 2019, and interim periods within fiscal years beginning after December 15,

18 FASB/IASB Changes Overview By Derek Anderson, MCR

19 Leases - Evaluating and responding to risks Presented by Chris Rouse Windham Brannon, PC 19

20 Leases - Evaluating and responding to risks Agenda Evaluating and responding to risks of material misstatement related to lease recognition, measurement and presentation 20

21 Leases - Evaluating and responding to risks Relevant Objectives Existence Completeness Valuation Accuracy Cutoff Rights and Obligations Disclosure Special considerations 21

22 Leases - Evaluating and responding to risks Relevant Objectives Existence of recorded leases o Obtain and extract contract terms o Consider confirmation No side agreements Any amendments, extensions, etc Clarification of vague matters relevant to accounting 22

23 Leases - Evaluating and responding to risks Relevant Objectives Completeness o Inquire, and believe but verify o Comparison of observation of property and equipment to list(s) of owned property and equipment o Review expense accounts likely to include leased items for recurring level payments o Review legal filings in local jurisdiction(s) 23

24 Leases - Evaluating and responding to risks Relevant Objectives Valuation and accuracy o Term Non-cancellable period Renewals Significant economic incentive judgments Reasonably certain criteria is a high standard o Amount Payments Variable payments Contingent payments Discount rate Implicit in lease vs entity incremental rate vs riskfree rate 24

25 Leases - Evaluating and responding to risks Relevant Objectives Valuation and accuracy (continued) o Classification as A or B lease A leases are personal property Separately recognize amortization and interest General ledger accounts should separate B leases are land and buildings (or part of building) Recognize single lease cost General ledger accounts will still have to be separate because of cash flow and disclosures o Lease modifications Consider changes in payment rates, review of correspondence files, etc Accounting department may not know about modifications 25

26 Leases - Evaluating and responding to risks Relevant Objectives Cutoff o Subsequent events should consider effective date of new leases Consider disclosure of material new leases o Review of new leases for prior year effective dates Restatement issue 26

27 Leases - Evaluating and responding to risks Relevant Objectives Rights and Obligations o See also Existence and Accuracy o The amount of the Obligation establishes the amount of the Right o Extract agreements for disclosure 27

28 Leases - Evaluating and responding to risks Relevant Objectives Disclosure o Use a GREAT disclosure checklist Set up a PBC template that captures all the information required to make the disclosures o Disclosure of undiscounted maturities will require spreadsheets o Disclosure of service elements may be contractual or general practice Also requires disclosure of future commitments for services 28

29 Leases - Evaluating and responding to risks Relevant Objectives Special considerations o Related party leases No carve-out or differential measurement or disclosure o Materiality Consider user needs Is information decision useful o EBIDAT Key measure for creditors Consider disclosures that facilitate users determining EBIDAT 29

30 Leases - Evaluating and responding to risks In conclusion Bon Auditpetite! Questions? Contact Chris Rouse crouse@windhambrannon.com

31 FASB/IASB Example By Derek Anderson, MCR

32 Example Facts = Type A *Example published by 32

33 Example ROU and Liability 33

34 Example - Interest 34

35 Example - Amortization 35

36 Example Type B 36

37 Example - Amortization 37

38 FASB/IASB Example By Derek Anderson, MCR

39 Leases Preparing your clients Presented by Chris Rouse Windham Brannon, PC 39

40 Leases Preparing your clients Preparing Your Clients for the New Lease Standard Identify users of the financial statements o Investors, banks, creditors o Consider meeting with users to discuss the new Standard Identify what s important to users o Balance sheet o Income statement o Cash flow/ebidat o Disclosure vs. measurement Especially informal related party leases o GAAP departure effect 40

41 Leases Preparing your clients Preparing Your Clients for the New Lease Standard Income tax considerations o Possible change in accounting method o Lease market terms will change before effective date to meet demand, which may trigger different tax effects Compensation considerations o Bonuses, retirement plan contributions, etc New leases before effective date o Terms can be altered in the context of market and competitive considerations to control impact on financial statements 41

42 Leases Preparing your clients Preparing Your Clients for the New Lease Standard Loan covenants o Existing loans that mature beyond effective date Changes on effective date could blow loan covenant compliance Recognition of additional liabilities could adversely affect lending relationship o Loan renewals before effective dates Include provisions regarding effects of the application of new accounting standards not affecting loan covenant compliance 42

43 Leases Preparing your clients Preparing Your Clients for the New Lease Standard Educate clients regarding Expecting vs. Knowing o Lease terms o Interest rate implicit in the lease o Related party leases especially Determine the need for new general ledger accounts o Lease assets in types and classes o Lease liabilities current and long term o Income statement amortization accounts o Cash flow break-outs o Disclosures too 43

44 Leases Preparing your clients Preparing Your Clients for the New Lease Standard Discuss accounting assistance that may be provided o Estimates o Calculations o Amortization tables Pro forma financial statements o Model the effects of new lease standard on the client s financial statements o Consider disclosure of pending accounting pronouncements in current financial statements 44

45 Leases Preparing your clients Preparing Your Clients for the New Lease Standard In current financial statements, include sufficient information about leases so that when the information migrates to the balance sheet, etc the users are not surprised o Lease periods and renewal provisions and expectations o Lease rates and future expectations 45

46 Leases Preparing your clients In conclusion Bon Auditpetite! Questions? Contact Chris Rouse