LEASES & HOT TOPICS PRESENTED BY: JASON MYERS & BRYAN CALLAHAN

Transcription

1 LEASES & HOT TOPICS PRESENTED BY: JASON MYERS & BRYAN CALLAHAN

2 LEASES PROJECT Summary of Key Changes & Impact 2

3 KEY CHANGES Lessee (the contractor usually) Requires recognition of most leases on their balance sheets as lease liabilities with corresponding right-of-use (ROU) assets Recognize expenses on their income statements in a manner similar to today s accounting Requires impairment testing for new ROU assets 3

4 KEY CHANGES Lessor (the equipment company, landlord, etc.) Aligns certain classification criteria & accounting guidance with lessee guidance & with the revenue recognition model in Topic 606 Includes an assessment of collectability to support classification as a direct financing lease & de-recognize asset & record revenue for sales-type lease Eliminates today s real estate-specific provisions for all entities Leveraged lease accounting not permitted for new transactions or existing transactions modified after the effective date 4

5 EFFECTIVE DATES Effective January 1, 2019 (public entity), including interim periods within those years, for any of the following: 1. Public business entities 2. A not-for-profit entity that has issued, or is a conduit bond obligor for securities that are traded, listed, or quoted on an exchange or an over-the-counter market 3. An employee benefit plan that files financial statements with the SEC For all other entities, the amendments are effective for fiscal years beginning after December 15, 2019 (2020 calendar year end), & interim periods within fiscal years beginning after December 15, All entities may early adopt 5

6 DETERMINING WHETHER A LEASE EXISTS Under the standard, a contract is or contains a lease if it conveys the right to control the use of identified property, plant or equipment (an identified asset) for a period of time in exchange for consideration An entity is required to reassess whether a contract is or contains a lease only if the terms & conditions of the contract are changed 6

7 RIGHT TO CONTROL THE USE OF THE ASSET A lease contract conveys the right to control the use of the identified asset for a specified period of time. A customer controls an identified asset when the customer has both of the following: Customer has right to direct its use (e.g. the right to direct how & for what purpose the asset is used, including the right to change how & for what purpose the asset is used) Customer has right to obtain substantially all economic benefits from its use 7

8 MULTIPLE LEASE COMPONENTS Both lessees & lessors will be required to separate lease & nonlease (service) components of a contract, & allocate contract consideration to each component Lessees will perform allocation based on observable relative standalone price basis Lessors will allocate the transaction price to separate performance obligations aligned with guidance in the new revenue recognition standard Components include only those items or activities that transfer a good or service to the lessee Lessees are permitted to make accounting policy election (by class of underlying asset) to account for lease & non-lease components as single lease component 8

9 SUBCONTRACT VS. LEASE? GC building new 15 story apartment building Subcontract for tower crane & operator GC controls scheduling of lifts on tower crane 24 month estimated construction period 9

10 LESSEE CLASSIFICATION Classification of leases is based on criteria in International Accounting Standards (IAS) 17 (similar to existing U.S. GAAP regarding capital vs. operating lease) Classification will be determined in accordance with the principles in current lease requirements, but without the bright-line tests (e.g. by determining whether a lease is effectively an installment purchase by the lessee) Lease will be classified finance lease if it transfers substantially all risks & rewards incident to ownership (meets one of the 5 criteria on the next page) All other leases will be classified as operating leases by lessee Classification continues to contain no bright-line criteria, but contains one additional criterion regarding the specialized nature of the underlying asset 10

11 FINANCE LEASE CRITERIA (SALES-TYPE FOR LESSOR) 1. Ownership of asset transfers to lessee by end of lease term 2. Lessee has option to purchase asset at price which is expected to be sufficiently lower than FV at date option becomes exercisable such that it is reasonably certain option will be exercised 3. Lease term is for major part of the economic life of asset Lessees (& lessors) are afforded an exception to the lease classification test & do not need to consider this criterion for leases that commence at or near the end of the underlying asset s economic life (e.g. in the final 25% of an asset s economic life). 4. PV of minimum lease payments amounts to at least substantially all of fair value of leased asset 5. NEW: The underlying asset is of such a specialized nature that it is expected to have no alternative use to the lessor at the end of the lease term 11

12 LESSEE CLASSIFICATION Lessee is required to reassess lease classification throughout the lease term upon the occurrence of: A change in lease term A change in the lessee s assessment of whether it is reasonably certain to exercise an option to purchase the underlying asset Contract modification that is not accounted for as a separate lease 12

13 LESSEE ACCOUNTING INITIAL MEASUREMENT All leases result in a liability for its lease obligation & an asset representing a lessee s right to use the underlying asset for the lease term Amount initially recorded as an ROU asset & lease liability is computed the same regardless of whether the lease is classified as an operating lease or as a finance lease The recognition, measurement, & presentation of expenses & cash flows arising from a lease by a lessee have not significantly changed from previous GAAP. 13

14 INITIAL MEASUREMENT OF LESSEE ROU ASSET & LEASE LIABILITIES Begin by measuring lease liability & make adjustments to get to ROU asset Lease liability = present value of future lease payments, using the effective interest method to subsequently account for the lease liability ROU asset = Lease liability + Initial direct expenses* + Payments made at or before lease commencement - Lessor-provided incentives *Incremental costs of a lease that would not have been incurred if the lease had not been obtained 14

15 LESSEE MODEL SUBSEQUENT ACCOUNTING Annual expense recognition & subsequent amortization of ROU asset depends on lease classification & accounting approach: A change in lease term Front-loaded expense pattern similar to today s capital leases with interest & amortization recognized separately Interest determined on the lease liability in each period during the lease term as the amount that produces a constant periodic discount rate ROU asset generally amortized on a straight-line basis Operating lease approach: Straight-line expense recognition similar to today s operating leases ROU Asset: Reduced by the difference between the lease expense & the interest cost on the lease liability 15

16 COMPARISON OF LESSEE ACCOUNTING MODELS Finance Lease Operating Lease Balance Sheet Balance Sheet Right of Use (ROU) Asset* Right of Use (ROU) Asset** Lease Liability Lease Liability Income Statement Interest Expense (on lease liability) Amortization Expense (on ROU asset) Income Statement Lease/Rent Expense (straightline) Cash Flow Cash paid for principal payments (financing activities) & interest payments (operating activities) *Periodically reduced by straight-line amortization Cash Flow Cash paid for lease payments **Periodically reduced by the difference between straight-line lease expense & interest cost on lease liability, i.e., plug figure 16

17 LEASE EXAMPLE Three-year lease term at $25,000 per year rent Lessee s incremental borrowing rate of 6% 17

18 LESSEE EXAMPLE LEASE LIABILITY Begin by calculating lease liability (net present value of lease payments) Same for finance & operating lease In subsequent years, lease liability is reduced by discounted lease payments Analysis of Liability to Make Lease Payments Beginning Balance $ (66,825) Year 1 interest ($66,825 *.06) $ (4,010) Year 1 lease payment 25,000 Balance at end of year 1 (45,835) Year 2 interest ($45,835 *.06) (2,750) Year 2 lease payment 25,000 Balance at end of year 2 (23,585) Year 3 interest ($23,585 *.06) (1,415) Year 3 lease payment 25,000 Balance at end of year 3-18

19 LESSEE EXAMPLE ROU ASSET FINANCE LEASE Beginning ROU asset is measured same as lease liability (plus initial direct expenses & other adjustments, as applicable) In subsequent years, amortize ROU asset evenly over three-year lease term (66,825/3) Analysis of Right-of-Use Asset Beginning Balance $ 66,825 Year 1 amortization ($66,825/3) $ 22,275 Balance at end of year 1 44,550 Year 2 amortization ($66,825/3) 22,275 Balance at end of year 2 22,275 Year 3 amortization ($66,825/3) 22,275 Balance at end of year 3-19

20 LESSEE EXAMPLE ROU ASSET OPERATING LEASE Initial measurement same as finance lease ROU asset In subsequent years, reduce ROU asset by difference between straightline lease expense & interest cost of lease liability Analysis of Right-of-Use Asset Beginning Balance $ 66,825 Year 1 accretion of lease liability (interest) $ 4,010 Year 1 lease expense ($75,000/3) (25,000) Balance at end of year 1 45,835 Year 2 accretion of lease liability (interest) 2,750 Year 2 lease expense ($75,000/3) (25,000) Balance at end of year 2 23,585 Year 3 accretion of lease liability (interest) 1,415 Year 3 lease expense ($75,000/3) (25,000) Balance at end of year 3-20

21 LEASE TERM Lease term is the non-cancelable period in which the lessee has the right to use an underlying asset, plus optional periods for which, after considering all relevant factors that may give lessee economic incentive to renew or terminate, it is reasonably certain that the lessee will: exercise the renewal option, or not exercise the termination option, or in which the exercise of those options is controlled by the lessor. 21

22 LEASE TERM Lessees will be required to reassess the lease term or a lessee option to purchase the underlying asset if & when the following occurs: 1. Upon the occurrence of significant event or change in circumstances directly attributable to actions of lessee that affects whether the lessee is reasonably certain to exercise or not to exercise an option to extend or terminate the lease, or to purchase the underlying asset (e.g. lessee makes significant modifications or customizations to the underlying asset) 2. The lessee elects to exercise (or not exercise) an option to extend or terminate the lease even though it had previously determined it was not reasonably certain to do so, or the contract term obliges the lessee to do so 22

23 INCEPTION DATE VS. COMMENCEMENT DATE Lease commencement is the date a lessor makes an underlying asset available for use to a lessee, & is the date for classification, recognition, & measurement The determination of whether a contract is a lease or contains a lease is done at the inception date Lease classification, recognition, & measurement are determined at the lease commencement date 23

24 DISCOUNT RATE Lessee uses the rate charged by the lessor if readily determinable (not likely) If not, use their incremental borrowing rate at lease commencement Lessor uses rate it charges lessee to discount its lease-related assets Lessees not public business entities may make accounting policy election to use a risk-free rate for initial & subsequent measurement of lease liabilities 24

25 LEASE PAYMENTS Includes: 1. Fixed payments 2. Variable lease payments linked to index or rate (e.g. CPI) Includes in-substance fixed payments 3. Amounts probable of being owed under a residual value guarantee (for lessees); full amounts at which residual assets are guaranteed by a lessee or by a third party (for lessor) 4. Payments related to renewal, termination or purchase options that the lessee is reasonably certain to exercise (consistent with the lease term) 5. Fees paid by the lessee to the owners of a special-purpose entity for structuring the transaction. 25

26 LESSEE BALANCE SHEET PRESENTATION Assets Present finance lease ROU assets & operating lease ROU assets as separate line items on face of balance sheet, or disclose in notes which line items in balance sheet include finance lease ROU assets & operating lease ROU assets Finance lease ROU assets cannot be presented in the same line item as operating lease ROU assets Liabilities Same separate presentation requirements as ROU assets Current liabilities will include payments due in next 12 months *Look out for working capital impact 26

27 DISCLOSURES Disclosures are required by lessees & lessors to meet a disclosure objective, which would enable users of financial statements to assess amount, timing, & uncertainty of cash flows arising from leases Requires qualitative disclosures along with specific quantitative disclosures Intent is to require enough information to supplement the amounts recorded in the financial statements so that users can understand more about the nature of an entity s leasing activities Entities will consider level of detail necessary to satisfy disclosure objective Entities will provide transition disclosures 27

28 TRANSITION Entities will use modified retrospective approach (assets & liabilities measured at implementation date over remaining life of lease; specific guidance provided) Lessees - Transition method applies to all capital & operating leases Lessors - Applies to all sales-type, direct financing & operating leases (leveraged leases grandfathered, but otherwise phased out) Applies to all outstanding leases, not just new leases Specific transition guidance for sale & leaseback transactions, build-to-suit transactions, leveraged leases, & amounts previously recognized under business combinations guidance for leases 28

29 TRANSITION PRACTICAL EXPEDIENTS FASB tentatively decided entity can choose to elect set of three specifically defined practical expedients all three or none must be used 1. Lessee (or lessor) need not reassess whether any expired or existing contracts are or contain leases 2. Lessee (or lessor) need not reassess the lease classification for any expired or existing lease (capital leases will be classified as finance leases, & operating leases will classified as operating leases) 3. Lessee (or lessor) need not reassess initial direct costs for any existing lease May also elect another, separate, practical expedient to use hindsight in evaluating lessee options to extend or terminate a lease or to purchase the underlying asset 29

30 IMPACT ON ACCOUNTING & REPORTING Policies, Processes & Controls Inventory & assessment of all agreements/contracts Significantly amend accounting policies & procedures Applies to all outstanding leases, not just new leases Ongoing remeasurement requirements, e.g., index or rate changes, modification to contract terms, lessee s assessment of options to extend or terminate, or purchase underlying asset Increased disclosure requirements Definitions requiring management s judgment, e.g., definition of lease, lease term, terminology, e.g., insignificant, reasonably certain, substantially all, & book vs. tax differences Internal control changes with policy & process changes 30

31 31 HOT TOPICS

32 Success in Applying Analytics = Becoming an Insight-Driven Organization 32

33 Definition of Analytics: analysis methods designed to extract useful information for answering strategic questions... 33

34 DATA VOLUMES ARE INCREASING Source: 34

35 HARNESSING DATA Key Performance Indicators (KPIs) What is a Key Performance Indicator? A performance measurement used to evaluate project & organizational success Quantifiable measurements that reflect the critical success factors of an organization Used to monitor & modify staff activities & results Can be financial or non-financial Benefits of KPIs Align your organization to meet vital objectives Make better decisions 35

36 OPERATIONAL KPI EXAMPLES Cost codes approaching or over budget (actual & committed) Labor hours or cost exceeding budget Productivity below estimate Change requests overdue Defects found Safety incidents Rent roll Repairs & maintenance by division/property Name yours! 36

37 Can you impact growth & profitability with KPI s? Yes but it s not simple Is your Organization innovative & imaginative find what drives growth Or content as followers, even if you re fast Where can the improvement come from? Better planning & forecasting Margin by property & unit Repairs by property & unit Property by property comparison Set goals for growth Goal #1 increase working capital in the next quarter by $XXX,000 KPI current ratio, acid ratio, contract margin, revenue per day Goal #2 increase average margin on contract revenue by 2% in the next quarter KPI average margin by customer, average margin by contract, average margin on new bids Goal #3 reduce the average labor hours on rework by 10% in the next quarter KPI rework labor hours per dollar of contract revenue, rework dollars as a % of total contract costs 37

38 38 Emerging Technologies

39 Standard Analysis (Excel, Access) Tools Data Analytics (ACL, IDEA, Arbutus) Data Visualization (Tableau, Analysts Notebook) Artificial Intelligence (Machine Learning, Social Media, Sentiment)

40 Structured Data Analytics Unstructured Data Analytics Visual Analytics Relationship Mapping Techniques

41 NEW & DEVELOPING TECHNOLOGIES Textual analytics Machine learning Supervised Unsupervised Advanced analytics Regression Predictive 41

42 Relationship Mapping Tone Detection Named Entity Extraction Textual Analytics Digital Forensics Predictive Coding Topic Mapping

43 DATA TYPES 43

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46 DEGREE 46

47 BETWEENNESS CENTRALITY 47

48 TEXTUAL ANALYTICS AT WORK 48

49 TEXTUAL ANALYTICS AT WORK ES [9:50 AM]: cable? CV [9:50 AM]: yes, so that helps. i never submit for it though. lol ES [9:51 AM]: lol, you want my company credit card number? we could autobill it :) CV [9:52 AM]: :) it's ok. i'll do it eventually. i don't think any of us work here for the money lol ES [9:52 AM]: let me know. i'm burning that thing up 49

50 IT CAN EVEN CATCH From: MF 3/19/2010 To: ES Subject: I am happy and distraught. Happy for you, distraught for me :) Who will take care of me?? I will be adrift and unloved. Seriously, I hope that you are happy at Company A and you already know you can work for Ryan so it should be a smooth transition. I just want you to know how much I truly appreciated everything you have done for me and my team. You will be missed... 50

51 MANAGING YOUR REPUTATION How are you viewed in market? What are your customers saying? What can you do to control conversation? 51

52 EMOTIONS: TONE DETECTION & SENTIMENT 52

53 EMOTIONS: TONE DETECTION & SENTIMENT Anger Frustration Anxiety/Nervous Tension Vague/evasive Conspiratorial Sadness Intimacy Positive Negative 53

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55 NEW MINDSET Communications & corporate assets are used to transact business Financial systems are used to transact business Transacting business = business transaction 55

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57 Jason Myers, CPA // Partner //