4/4/2018. GASB's New Leases Standard
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1 GASB's New Leases Standard April 4,
2 TO RECEIVE CPE CREDIT Participate in entire webinar Answer polls when they are provided If you are viewing this webinar in a group Complete group attendance form with Title & date of live webinar Your company name Your printed name, signature & address All group attendance sheets must be submitted to training@bkd.com within 24 hours of live webinar Answer polls when they are provided If all eligibility requirements are met, each participant will be ed their CPE certificate within 15 business days of live webinar Today s Presenters Christopher Telli, CPA, CIA Partner ctelli@bkd.com Deborah Beams, CPA Director dbeams@bkd.com 2
3 Background of Statement 87 Reexamine issues associated with lease accounting Issuance of concepts statements Evaluate standards in effect for sufficient time FASB/IASB project Project began April 2013 Preliminary Views November 2014 Public hearings Field test Exposure Draft January 2016 Final Standard June 2017 Definition of a Lease A contract that conveys control of the right to use another entity s nonfinancial asset (the underlying asset) as specified in the contract for a period of time in an exchange or exchange-like transaction 3
4 Scope Exceptions Leases of Intangible assets Biological assets Inventory Assets financed with conduit debt* Service concession arrangements Supply contracts *Unless lessor reports asset & conduit debt Foundational Principle Leases are financings 4
5 Lease Term *If reasonably certain that option will be exercised Noncancelable Period Periods covered by lessee or lessor s option to extend* Lease Term Periods covered by a lessee or lessor s option to terminate** **If reasonably certain that option will not be exercised Periods subject to fiscal funding clause*** ***Unless reasonably certain that clause will be exercised Periods for which both lessee & lessor have option to terminate or both have to agree to extend Lease Term Examples Renewal option 5-year lease with 2-year renewal option for lessee Lease of building for lowincome health clinic Reasonably certain will renew Lease term = 7 years Month-to-month 2-year initial term, then monthto-month Lessee or lessor could cancel at any time after initial term No enforceable obligation then Lease term = 2 years 5
6 Lessees Lease liability Intangible right to use asset Interest expense on liability Amortization expense of asset Recognition & Measurement Liability Initial measurement of a lease liability includes present value of Fixed payments to be made over lease term, less any lease incentives Variable payments based on an index or rate, using rate in effect at lease commencement Variable payments that are in-substance, fixed Residual value guarantees reasonably certain of being required Purchase options reasonably certain of being exercised Termination penalties if lease term reflects lessee exercising option to terminate lease or fiscal funding/cancellation clause Other payments reasonably certain of being paid 6
7 Recognition & Measurement Liability Does not include lease payments dependent on a lessee s performance or usage of an underlying asset Recognition & Measurement Lease liability payments should be discounted using rate lessor charges lessee, or lessee s incremental borrowing rate (rate cannot be readily determined) Amortize discount to interest expense Payments allocated between interest & lease liability 7
8 Recognition & Measurement Asset Recognize an intangible asset for right to use underlying asset Initial measurement of a lease asset includes Value of initial lease liability Any prepayments (amounts paid for lease prior to measuring lease liability) Initial direct costs if they are ancillary charges to place leased asset into use Lease incentives received reduce cost of lease assets Initial direct costs (debt issuance costs) should be expensed Recognition & Measurement Lease asset amortized using a systematic & rational basis over shorter of useful life of underlying asset or lease term If lease contains a purchase option reasonably certain of being exercised, amortize over the useful life of the underlying asset Classify amortization of lease asset as amortization expense 8
9 Remeasurement Remeasurement of a lease liability when certain changes occur Lease term Likelihood (reasonably certain to not reasonably certain or vice versa) of a purchase option being exercised Amounts expected to be payable under a residual value guarantee or when there is a change in likelihood (reasonably certain to not reasonably certain or vice versa) a payment will be required A change in the estimated amounts for payments included in the measurement of the lease liability Interest rate lessor charges lessee (if used as discount rate) Contingency upon which variable lease payments are based changes & payment should now be included (variable to fixed payments) Remeasurement Update of discount rate as part of remeasurement when Lease term is changed There is a change in likelihood (reasonably certain to not reasonably certain or vice versa) a purchase option will be exercised 9
10 Adjustment To Liability Adjustments to lease liability generally should adjust lease asset by same amount If adjustment is greater than carrying value of asset, difference is recognized in flows statement Right To Use Asset Intangible right-of-use asset in a lease is a capital asset Accounted for in accordance with existing authoritative guidance for capital assets Relationship between underlying asset & lease asset could mean indicators of impairment present (change in manner or duration of use of lease asset) A change in manner or duration of use of lease asset may indicate impairment of that asset When asset underlying a lease is damaged & requires restoration or replacement, time period during which underlying asset is not usable generally is relevant factor in assessing whether impairment test has been met An impaired lease asset first would be adjusted by any change in corresponding lease liability, with any remaining adjustment recognized as impairment loss 10
11 Lessee Disclosures Lessees required to disclose the following A general description of leasing arrangements Total amount of leased assets & related accumulated amortization, disclosed separately from owned assets Total variable lease payments actually incurred during reporting period (not already included in lease liability) Lease assets disaggregate by major classes of underlying assets Amount of other payments (residual guarantees, termination payments) not already included in lease liability A maturity analysis of future minimum lease payments that shows payments for each of first five years & five-year increments thereafter, with payments shown undiscounted & total interest summed for all years Lessee Disclosures Lessees required to disclose the following Lease commitments, other than short-term leases, for which lease term has not begun Components of a net impairment loss Other leasing transactions Sublease Sales-leaseback Lease-leaseback Related-party leases 11
12 Lessor Model Overview Financed giving up of the right to use an asset Lease receivable Deferred inflow of resources Lease revenue & interest revenue No derecognition of underlying asset Lessor Model Exceptions Short-term leases Contracts that transfer ownership Leasing out assets that are investments Certain regulated leases 12
13 Lessor Model Receivable Present value of future payments for lease term Fixed payments Variable payments based on index or rate Variable payments fixed in substance Residual value guarantees fixed in substance Lease incentives due to lessee Discount using rate lessor charges lessee Amortize discount to interest revenue Lessor Model Deferred Inflow Initial value Lease receivable Lease payments received that relate to future periods Subsequent measurement Recognition as an inflow (revenue) over term of lease Systematic & rational method 13
14 Lessor Model Underlying Asset Do not derecognize underlying asset Continue accounting for it as always Depreciation, impairment, etc. Except: lease requires it to be returned in same or enhanced condition So I have two assets: a receivable & the underlying asset? Yes. Cost-benefit decision by the GASB. Do you remove part of a building & then put it back when lease is over? Lessor Model Disclosures General description of leasing arrangements Total revenues (inc. interest) recognized in the period Revenues for payments not previously in receivable Terms of lessee cancellation options if payments secure debt of the lessor If principal operations are leasing, future payment schedule 14
15 Lessor Model Disclosures Regulated Leases General description of agreements Preferential or exclusive use provisions Total revenues (inc. interest) recognized in the period Future minimum payment schedule Revenues for payments not previously in schedule Terms of lessee cancellation options if payments secure debt of the lessor Certain Regulated Leases 15
16 Certain Regulated Leases Lessors that meet certain provision exempt from lessor recognition provisions Instead recognize revenue based on contractual payment provisions & provide specific disclosures (para 60) Certain Regulated Leases Exemption requires that laws, regulations or legal rulings establish ALL of the following 1. Lease rates do not exceed a reasonable amount, with reasonableness subject to external regulators 2. Lease rate are similar for similar lessees 3. Cannot deny potential lessees if facilities available (assuming compliance with use restrictions) 16
17 Airport Issues Impact For Airports Appears GASB expects all aviation agreements to meet regulated lease provisions based on current laws, regulations or legal rulings FAA Policy Statements & other rulings require aeronautical uses of airports to meet requirement of Statement 87 Concessionaire & non-aviation agreements are not expected to meet regulated lease provisions Airport Issues Airline Agreements GASB intended to provide exemption for airline use agreements Different from typical leases (financing of right to use underlying asset) Payments vary from period to period Cost-recovery nature Revenue-sharing provisions Appropriate to recognize lease revenue based on provision of the airline agreements 17
18 Airport Issues Other Leases Variety of other leasing agreements Concessions Rental car facilities FBO These expected to be subject to regular lease model Consideration of contract terms (cancellation clauses) Airport Issues Impact For Airports May be a large volume of leases to analyze & track (completeness) A portion of lease revenue currently presented as operating could be recognized as interest income (nonoperating), which could negatively impact rate covenant calculations Recognition of a potentially large receivable & deferred inflow of resources 18
19 Airport Issues Impact For Airports Lessor balance sheets/statements of net position would include both the leased asset & the lease receivable Potentially a significant increase in liabilities Interest expense vs. lease expense Operating vs. nonoperating expense classification Other Topics 19
20 Short-Term Leases Practicality exception for short-term leases A short-term lease is one that, at beginning of lease, has maximum possible term under contract, including any options to extend, of 12 months or less Maximum possible term for a cancellable lease defined as the noncancellable period, including any notice periods Leases that transfer ownership do not qualify for short-term lease exception, even if they meet other criteria Lessees not required to recognize assets or liabilities associated with right to use underlying asset for short-term leases Lease payments recognized as expenses/expenditures based on terms of contract Contracts With Multiple Components Generally, a government should account for the lease & non-lease components of a lease as separate contracts If a lease involves multiple underlying assets, lessees & lessors in certain cases should account for each underlying asset as a separate lease contract 20
21 Contracts With Multiple Components Lessees allocate consideration to multiple components Contract Combinations Contracts that are entered into at or near the same time with the same counterparty & that meet certain criteria should be considered part of the same lease contract & should be evaluated in accordance with the guidance for contracts with multiple components 21
22 Lease Incentives A payment made to, or on behalf of, lessee for which the lessee has a right of offset with its obligation to the lessor Equivalent to a rebate or discount Explicit guidance clarifying the accounting for lease incentives based on when incentive is received before or after lease inception Subleases Issues relating to subleases Accounted for as transactions separate from their original leases (two separate transactions) Disclosure of treatment of subleases Subleases would be noted as one of items to be included in general description of lease arrangements (if applicable) Lessor transactions related to subleases would be disclosed separately from original lessee transactions 22
23 Sale-Leaseback Transactions Sale-leaseback transaction should include a qualifying sale in order to be eligible for sale-leaseback accounting Sale & leaseback portions of a sale-leaseback transaction should be accounted for separately as a sale transaction & a lease transaction, except that any gain or loss on sale should be deferred & recognized over term of lease Lease-Leaseback Transactions Lease-leaseback transaction should be accounted for as a net transaction, with disclosure of gross amounts for each portion of transaction 23
24 Leases With Certain Counterparties Related-party leases should be recognized based on substance of transaction, when substance is significantly different from form Nature & extent of leasing transactions should be disclosed Leases With Certain Counterparties Current treatment for leases with blended component units do not report lease in financial reporting entity s financial statements is retained Current treatment for leases with discretely presented component units no elimination, but separate presentation of lease receivable & payable is retained 24
25 Effective Date & Transition Periods beginning after December 15, 2019 Retroactive Restate prior periods presented Cumulative effect to beginning net position/fund balance Facts & circumstances existing at implementation Prepare for Implementation Inventory lease contracts & potential lease contracts Capture key data & develop mechanism to track it Reconsider lease vs. buy decisions Check wording of covenants Consider renegotiating if lease liability might cause violation GASB Implementation Guide coming 25
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