SAB 74 DISCLOSURE ANALYSIS FOR LEASE ACCOUNTING

Transcription

1 SAB 74 DISCLOSURE ANALYSIS FOR LEASE ACCOUNTING Top 100 US Public Companies Ranked By Leasing Obligations ASC 842 LEASE ACCOUNTING STANDARDS

2 TABLE OF CONTENTS Executive Summary... 3 SAB 74 Disclosures... 3 Key Findings... 4 Detailed Analysis... 5 Balance Sheet Impacts Income Statement Cash Flow Statement Early Adoption Transition Method Practical Expedients Implementation Progress Project Team Software Evaluation And Selection Policies & Controls Lease Accounting Change SAB 74 Disclosures Additional References Top 100 Us Companies Ranked By Leasing Obligations LeaseAccelerator, Inc. All rights reserved. This document is the copyrighted work of LeaseAccelerator, Inc.

3 EXECUTIVE SUMMARY SAB 74 DISCLOSURES As the implementation deadlines for ASC 842 grow closer, public filers will be required to include a discussion of the potential future impacts to their financial statements from the new lease accounting standards. SEC Staff Accounting Bulletin Topic 11.M (SAB 74) requires SEC filers to disclose the effects of accounting standards that have been announced but not yet adopted. The guidance from the bulletin encourages registrants to consider disclosing: A brief description of the new standard, the date that adoption is required, and the date that the registrant plans to adopt, if earlier. A discussion of the methods of adoption allowed by the standard and the method expected to be utilized by the registrant, if determined. A discussion of the impact that adoption of the standard is expected to have on the financial statements of the registrant, unless not known or reasonably estimable. In that case, a statement to that effect may be made. Disclosure of the potential impact of other significant matters that the registrant believes might result from the adoption of the standard (such as technical violations of debt covenant agreements, planned or intended changes in business practices, etc.) is encouraged. In an effort to assist the industry with accelerated adoption of the new lease accounting standards, LeaseAccelerator compiled 100 examples of SAB 74 disclosures from SEC registrants over the past 15 months. We focused on the top 100 US public companies as ranked by the total leasing obligations tabularized in the footnotes of annual filings. The source of the data was 10-Q and 10-K filings submitted between January 1, 2017 and March 31, TOP 100 US PUBLIC COMPANIES RANKED BY LEASING OBLIGATIONS 3

4 KEY FINDINGS Early Adoption With the revenue recognition standard (ASC 606) a number of companies including Alphabet, Microsoft, General Dynamics, Ford, and Raytheon were early adopters. Only one of the 100 companies analyzed, Microsoft, adopted the standards early. No other companies stated their intention to early adopt. Transition Approach At the time these disclosures were analyzed, the only available transition approach for lessees was the modified retrospective approach, so companies either said they would elect that approach or did not comment on the approach. However, a new transition approach was proposed in November 2017 and approved in March We expect companies to state their selection of transition method in their next disclosures. Material Impacts to Balance Sheets As expected, the new right-of-use assets and liabilities being added to balance sheets is expected to be the most material impact to financial statements. 76% of the Top 100 reported that there will be a material impact resulting from the transfer of most right-of-use assets and liabilities on to corporate balance sheets. Another 20% are still analyzing the potential impacts of the new standard. Quantitative Impacts Companies are still in the process of estimating the definitive size of their leasing portfolios under ASC 842. Only 8% provided quantitative estimates of the material impact to the balance sheet, which ranged from $1.2 billion to $13 billion. Limited Impacts to Income Statement and Cash Flow Statements 28% of the Top 100 reported that there would not be a material impact to their income statement from ASC 842. Another 66% are still analyzing the impacts. 19% of the Top 100 reported there would be no impact to their cash flow statements and 64% are still analyzing the impact. Implementation Progress The level of information disclosed about the progress of implementation efforts is still relatively limited by most filers. Of the companies we analyzed, only 18% stated they are evaluating or implementing new policies and controls to support the standard. Similarly, amongst the filers we reviewed, only 18% stated they are evaluating or have selected a lease accounting software application. Only 13% indicated that a project team had been formed to address the new standard. 4 SAB 74 DISCLOSURE ANALYSIS FOR LEASE ACCOUNTING (ASC 842)

5 DETAILED ANALYSIS BALANCE SHEET IMPACTS BALANCE SHEET IMPACTS Balance Sheet Impacts will be Material As expected, the most material impact to financial statements cited by most filers is the new right-of-use assets and liabilities being added to the balance sheets. 76% of the Top 100 reported that there will be a material impact resulting from the transfer of most right-of-use assets and lease liabilities onto corporate balance sheets. Another 20% are still analyzing the potential impacts of the new standard. Still Evaluating 19% Not Material 2% Not Stated 2% Goldman Sachs and Bank of America were the only two companies in our sample set that indicated that the impact would not be material. However, other financial institutions such as CIT, JPMorgan & Chase ($10B), and Citigroup ($5B) did indicate that the balance sheet impact would be material, so there does not appear to be an industry-wide trend for commercial banks. Material Impact 73% Companies are still in the process of estimating the definitive size of their leasing portfolios under ASC 842. Only 8% provided quantitative estimates of the material impact to the balance sheet, which ranged from $1.2 billion to $13 billion. EXAMPLES OF DISCLOSURE COMMENTS RELATED TO BALANCE SHEETS SEC REGISTRANT EXCERPT OF DISCLOSURE Apple While the Company is currently evaluating the timing and impact of adopting ASU , currently the Company anticipates recording lease assets and liabilities in excess of $9.6 billion on its Condensed Consolidated Balance Sheets, with no material impact to its Condensed Consolidated Statements of Operations. However, the ultimate impact of adopting ASU will depend on the Company s lease portfolio as of the adoption date. Walt Disney As of September 30, 2017, the Company had an estimated $3.3 billion in undiscounted future minimum lease commitments. Southern Southern Company has substantially completed a detailed inventory and analysis of its leases. In terms of rental charges and duration of contracts, the most significant leases relate to cellular towers and PPAs where certain of Southern Company's subsidiaries are the lessee and to land and outdoor lighting where certain of Southern Company's subsidiaries are the lessor. The traditional electric operating companies are currently analyzing pole attachment agreements, and a lease determination has not been made at this time. While Southern Company has not yet determined the ultimate impact, adoption of ASU is expected to have a significant impact on Southern Company's balance sheet. Charter Communications The Company expects its leases designated as operating leases in Note 20 will be reported on the consolidated balance sheets upon adoption. The Company is currently evaluating the impact to its consolidated financial statements as it relates to other embedded lease arrangements of the business. TOP 100 US PUBLIC COMPANIES RANKED BY LEASING OBLIGATIONS 5

6 INCOME STATEMENT Under ASC 842, there is expected to be little impact to the income statement. Operating leases will still be presented on the same line-item on the income statement, the same as under the current standards, ASC 840. For finance leases, which replace capital leases under ASC 840, the interest and amortization will still be presented separately. As a result, we expect few of the remaining 66% still evaluating and the 6% that did not comment on the income statement impacts to find a material impact to the income statement. CASH FLOW STATEMENT The new standard requires leases to be reported as finance activities on the cash flow statement rather than as operating activities, which was required under ASC 840. However, this change is not expected to change net cash flows because the decrease in operating activities should result in an equal increase in finance activities. Therefore, we do not expect that many of the 64% of companies still evaluating or 18% that did not comment on cash flow statements to find that there is a material impact to their net cash flow statements. EARLY ADOPTION With the revenue recognition standard (ASC 606) a number of companies including Alphabet, Microsoft, General Dynamics, Ford, and Raytheon were early adopters. The lease accounting standard has very few early adopters thus far. Only one of the 100 companies analyzed, Microsoft, has early adopted. TRANSITION METHOD With other recent accounting changes, such as revenue recognition, much of the focus for SAB 74 disclosures was on the transition approach being adopted. However, until recently, only a modified retrospective approach was allowed under ASC 842. The modified retrospective method would have required companies to not only transition at the date of adoption, but also provide reports of their lease data under ASC 842 from the earliest comparative period to the effective date. For example, companies who will adopt on January 1, 2019 would have been required to report their lease data from January 1, 2017 to January 1, 2019 under both ASC 840 and ASC 842. However, on March 7, 2018 FASB voted to offer a simpler transition method that eliminates the need for comparative reporting. We expect that many companies will choose this approach as it reduces the implementation burden for corporate accounting organizations. Several companies, including Walt Disney and Advance Auto Parts, referred to the proposal in their disclosures, though did not state whether they would elect the option if approved. We anticipate that now that the proposal has been approved, many SEC files will state which transition approach they will use in their next disclosures. 6 SAB 74 DISCLOSURE ANALYSIS FOR LEASE ACCOUNTING (ASC 842)

7 PRACTICAL EXPEDIENTS Amongst our sample set, only six companies indicated an intention to elect the practical expedients available under ASC 842. Another five companies indicated that they were investigating the practical expedients. However, most did not provide any commentary. ADOPTING PRACTICAL EXPEDIENTS 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Decided to Adopt Evaluating No Comment EXAMPLES OF DISCLOSURE COMMENTS RELATED TO PRACTICAL EXPEDIENTS SEC REGISTRANT Target Duke Energy Equinix EXCERPT OF DISCLOSURE We will take advantage of the transition package of practical expedients permitted within the new standard, which among other things, allows us to carryforward the historical lease classification. In addition, we are electing the hindsight practical expedient to determine the reasonably certain lease term for existing leases. While lease classification will remain unchanged, hindsight will result in generally shorter accounting lease terms and useful lives of the corresponding leasehold improvements. We will make an accounting policy election that will keep leases with an initial term of 12 months or less off of the balance sheet and will result in recognizing those lease payments in the Consolidated Statements of Operations on a straight-line basis over the lease term. Upon adoption, Duke Energy expects to elect the practical expedients, which would require no reassessment of whether existing contracts are or contain leases as well as no reassessment of lease classification for existing leases. Additionally, we expect to adopt the optional transition practical expedient allowing the entity not to reassess the accounting for land easements that currently exist at the adoption of the lease standard on January 1, The Company plans to elect the practical expedient that it will not reassess whether any expired or existing contracts are or contain leases, the lease classification for any expired or existing leases or initial direct costs for any existing leases. The Company does not plan to elect the practical expedient to use hindsight in determining the lease term and in assessing impairment of right-of-use assets. TOP 100 US PUBLIC COMPANIES RANKED BY LEASING OBLIGATIONS 7

8 IMPLEMENTATION PROGRESS The level of information disclosed about the progress of implementation efforts is still relatively limited by most filers. A significant work effort will be required to comply with the new lease accounting standards by most companies with portfolios in excess of $100M. Changes will be required to accounting systems, business processes, and financial controls. A cross-functional project team will need to be formed consisting of stakeholders that use the leased assets such as Real Estate, IT, and Operations as well as corporate functions that administer the leases such as Procurement, Corporate Treasury, and Accounts Payable. The project team will need to devise a strategy for identifying all of the leasing contracts across the enterprise including categories such as real estate, IT, fleet, material handling, and other industry-specific assets. Once the population of leases is identified, the contracts for each will need to be identified in order to abstract the data necessary for accounting. Most companies will implement a new software application designed to perform the specialized lease accounting required for ASC 842. Once selected, the software application will need to be tested for functionality, integrated with other financial systems, and rolled out with training to end users. EXAMPLES OF DISCLOSURE COMMENTS RELATED TO IMPLEMENTATION SEC REGISTRANT AutoZone O Reilly Automotive Kroger Dollar General EXCERPT OF DISCLOSURE The Company established a cross-functional implementation team to evaluate and identify the impact of ASU on the Company s financial position, results of operations and cash flows. Based on the preliminary work completed, the Company is considering the possible implications of the new standard, including the discount rate to be used in valuing new and existing leases, the treatment of existing favorable and unfavorable lease agreements acquired in connection with previous acquisitions, procedural and operational changes that may be necessary to comply with the provisions of the guidance and all applicable financial statement disclosures required by the new guidance. The Company is also in the process of identifying changes to its business processes, systems and controls to support adoption of the new standard. We have established a task force, composed of multiple functional groups inside of the Company, which is currently in the process of evaluating critical components of this new guidance and the potential impact of the guidance on our financial position, results of operations and cash flows. Based on the preliminary work completed, we are considering the potential implications of the new standard on determining the discount rate to be used in valuing new and existing leases, the treatment of existing favorable and unfavorable lease agreements acquired in connection with previous acquisitions, procedural and operational changes that may be necessary to comply with the provisions of the guidance and all applicable financial statement disclosures required by the guidance, all of which are areas that could potentially be impacted by adoption of the guidance. This evaluation process includes reviewing all forms of leases, performing a completeness assessment over the lease population, analyzing the practical expedients and assessing opportunities to make certain changes to the Company s lease accounting information technology system in order to determine the best implementation strategy. Specifically, the Company has formed a project team that is developing test plans for its lease accounting system, identifying and evaluating existing contracts for embedded leases, and discussing implementation plans with its lease accounting software vendor, among other activities. 8 SAB 74 DISCLOSURE ANALYSIS FOR LEASE ACCOUNTING (ASC 842)

9 PROJECT TEAM Amongst our sample set, only 13% indicated that a project team had been formed to address the new standard. Leadership of the lease accounting project typically sits within the finance or accounting team. However, unlike many other accounting change projects, there is a need for a cross-functional enterprise team to address the leasing standards. A significant amount of business process transformation and data collection will be required from both the users of leased assets and the corporate functions that support the leasing program. The users of leased assets span almost every function in the business, including Corporate IT, Real Estate, Fleet, and Operations. The organizations that touch leases throughout their lifecycle include Legal and Procurement, Treasury and Tax, and Accounts Payable and Receivables. PROJECT TEAM 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Team Established No Comment EXAMPLES OF DISCLOSURE COMMENTS RELATED TO PROJECT TEAMS SEC REGISTRANT New York Community Bancorp DaVita Telephone & Data Systems EXCERPT OF DISCLOSURE The company has assembled a project management team, formed a working group comprised of associates from different disciplines, such as Vendor Risk Management, Real Estate, and Technology, including working with associates engaged in the procurement of goods and services used in the Company s operations. We have made substantial progress in reviewing contractual arrangements for embedded leases in an effort to identify the Company s full lease population and is presently evaluating all of its leases, as well as contracts that may contain embedded leases, for compliance with the new lease accounting rules. The Company has assembled an internal lease task force that meets regularly to discuss and evaluate the overall impact of this guidance on its consolidated financial statements and related disclosures, as well as the expected timing of adoption. At Cellco, a cross-functional coordinated implementation team has been established to implement the standard update related to leases. The Partnership is in the process of determining the scope of arrangements that will be subject to this standard as well as assessing the impact to its systems, processes and internal controls to meet the standard update s reporting and disclosure requirements. TOP 100 US PUBLIC COMPANIES RANKED BY LEASING OBLIGATIONS 9

10 SOFTWARE EVALUATION AND SELECTION Similarly, amongst the filers we reviewed only 18% are evaluating or have selected a lease accounting software application. Historically, most companies have performed lease accounting and financial reporting under the current standards using a collection of spreadsheets. Although ASC 842 does not require the use of any specific software application, we believe that most companies with leasing portfolios in excess of $50M will elect to purchase new technology. Since the introduction of ASC 842, a number of commercial, off-the-shelf software packages have been released to the market specifically designed to support the new lease accounting requirements. These applications feature dedicated leasing subledgers that track all the necessary journal entries, accounting engines to perform multiple set-of-book reporting, and algorithms to automatically classify contracts as operating or finance leases. SOFTWARE EVALUATION AND SELECTION 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Evaluating SoftwareV endor Selected Implementing Software No Comments EXAMPLES OF DISCLOSURE COMMENTS RELATED TO SOFTWARE IMPLEMENTATION SEC REGISTRANT Advance Auto Parts Ascena Retail Group CenturyLink Valero Energy EXCERPT OF DISCLOSURE The Company has selected its leasing software solution and is in the process of identifying changes to its business processes, systems and controls to support adoption of the new standard in The Company is also in the process of implementing a new lease administration system and identifying changes to its business processes and controls to support adoption of the new standard in Fiscal We have completed our initial assessment of our business and system requirements and we are currently developing and implementing a new lease accounting and administrative system to comply with the requirements of ASU We are enhancing our contracting and lease evaluation systems and related processes, and we are developing a new lease accounting system to capture our leases and support the required disclosures. During 2018, we will continue to monitor the adoption process to ensure compliance with accounting and disclosure requirements. We also continue the integration of our lease accounting system with our general ledger, and we will make modifications to the related procurement and payment processes. 10 SAB 74 DISCLOSURE ANALYSIS FOR LEASE ACCOUNTING (ASC 842)

11 POLICIES AND CONTROLS Of the companies we analyzed, only 18% are evaluating or implementing new policies and controls to support the standard. With leases representing a significant set of assets and liabilities on the balance sheet, many companies may adopt additional best practices to ensure that leasing portfolios are being optimized. Accounting organizations will need to ensure that they maintain complete, accurate, and up-to-date records of all leases across the business not only at commencement of the contract, but also throughout the term of the agreement. New business processes will need to be put in place to ensure all the necessary data required for accounting is collected at the start of the lease. Controls will be required to ensure that any contractual updates or business plan changes resulting in a modification or reassessment are relayed to the accounting organization. CHANGES TO POLICIES AND CONTROLS 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Evaluating Changes Implementing Changes No Comments EXAMPLES OF DISCLOSURE COMMENTS RELATED TO POLICIES AND CONTROLS SEC REGISTRANT EXCERPT OF DISCLOSURE Starbucks In preparation for adoption of the guidance, we are in the process of implementing controls and key system changes to enable the preparation of financial information. IBM A cross-functional implementation team has been established which is evaluating the lease portfolio, system, process and policy change requirements. Marathon Petroleum We are currently evaluating the impact of this standard on our financial statements and disclosures, internal controls and accounting policies. This evaluation process includes reviewing all forms of leases, performing a completeness assessment over the lease population and analyzing the practical expedients in order to determine the best path of implementing changes to existing processes and controls along with necessary system implementations. We completed our system implementation evaluation during the fourth quarter of 2017, and concluded we will implement a third-party supported lease accounting information system solution to account for our leases. We have begun a project to implement this system and are currently collecting the necessary information on our lease population, establishing a new lease accounting process and designing new internal controls for the new process. We do not plan to early adopt the standard. We believe the impact will be material on the consolidated financial statements as all leases will be recognized as a right of use asset and lease obligation. Based on results of our evaluation process to date, we also believe the impact on our existing processes, controls and information systems may be material. TOP 100 US PUBLIC COMPANIES RANKED BY LEASING OBLIGATIONS 11

12 LEASE ACCOUNTING CHANGE EXAMPLES OF STANDARD DISCLOSURE COMMENTS ON ASC 842 SEC REGISTRANT NRG Energy CenturyLink ConocoPhillips EXCERPT OF DISCLOSURE The Company will adopt the standard effective January 1, 2019, and expects to elect certain of the practical expedients permitted, including the expedient that permits the Company to retain its existing lease assessment and classification. The Company is currently working through an adoption plan which includes the evaluation of lease contracts compared to the new standard. While the Company is currently evaluating the impact the new guidance will have on its financial position and results of operations, the Company expects to recognize lease liabilities and right of use assets. The extent of the increase to assets and liabilities associated with these amounts remains to be determined pending the Company s review of its existing lease contracts and service contracts which may contain embedded leases. While this review is still in process, NRG believes the adoption of Topic 842 will have a material impact on its financial statements. The Company is continuing to monitor potential changes to Topic 842 that have been proposed by the FASB and will assess any necessary changes to the implementation process as the guidance is updated. We have completed our initial assessment of our business and system requirements and we are currently developing and implementing a new lease accounting and administrative system to comply with the requirements of ASU We plan to adopt the standard when it becomes effective for us beginning January 1, 2019 and the adoption of the standard will result in the recognition of right of use assets and lease liabilities that have not previously been recorded. Although we believe it is premature as of the date of this report to provide any estimate of the impact of adopting ASU , we do expect that it will have a material impact on our consolidated financial statements. Additionally, upon the January 1, 2019, implementation of ASU , accounting for the failed-sale-leaseback transaction described in Note 3 Sale of Data Centers and Colocation Business will no longer be applicable based on our facts and circumstances, and the real estate assets and corresponding financing obligation will be derecognized from our consolidated balance sheet. We plan to adopt ASU No , as amended, effective January 1, 2019, and continue to evaluate the ASU to determine the impact of adoption on our consolidated financial statements and disclosures, accounting policies and systems, business processes, and internal controls. We also continue to monitor proposals issued by the FASB to clarify the ASU and certain industry implementation issues. While our evaluation of ASU No and related implementation activities are ongoing, we expect the adoption of the ASU to have a material impact on our consolidated financial statements and disclosures. For additional information, see Note 24 New Accounting Standards, in the Notes to Consolidated Financial Statements. 12 SAB 74 DISCLOSURE ANALYSIS FOR LEASE ACCOUNTING (ASC 842)

13 SAB 74 DISCLOSURES EXCERPT FROM TOPIC 11: MISCELLANEOUS DISCLOSURE M. Disclosure Of The Impact That Recently Issued Accounting Standards Will Have On The Financial Statements Of The Registrant When Adopted In A Future Period Facts: An accounting standard has been issued5 that does not require adoption until some future date. A registrant is required to include financial statements in filings with the Commission after the issuance of the standard but before it is adopted by the registrant. Question 2: Does the staff have a view on the types of disclosure that would be meaningful and appropriate when a new accounting standard has been issued but not yet adopted by the registrant? Interpretive Response: The staff believes that the registrant should evaluate each new accounting standard to determine the appropriate disclosure and recognizes that the level of information available to the registrant will differ with respect to various standards and from one registrant to another. The objectives of the disclosure should be to (1) notify the reader of the disclosure documents that a standard has been issued which the registrant will be required to adopt in the future and (2) assist the reader in assessing the significance of the impact that the standard will have on the financial statements of the registrant when adopted. The staff understands that the registrant will only be able to disclose information that is known. The following disclosures should generally be considered by the registrant: A brief description of the new standard, the date that adoption is required and the date that the registrant plans to adopt, if earlier. A discussion of the methods of adoption allowed by the standard and the method expected to be utilized by the registrant, if determined. A discussion of the impact that adoption of the standard is expected to have on the financial statements of the registrant, unless not known or reasonably estimable. In that case, a statement to that effect may be made. Disclosure of the potential impact of other significant matters that the registrant believes might result from the adoption of the standard (such as technical violations of debt covenant agreements, planned or intended changes in business practices, etc.) is encouraged. TOP 100 US PUBLIC COMPANIES RANKED BY LEASING OBLIGATIONS 13

14 ADDITIONAL REFERENCES SAB 74 DISCLOSURES - GENERAL MFA, Reminder: SEC SAB 74 Disclosures and Controls for New Accounting Standards, cpa.com/en/our%20insights/2017/07/reminder%20sec%20sab%2074%20 Disclosures%20and%20Controls%20for%20New%20Accounting%20Standards.aspx PwC, Recently issued accounting standards Governance considerations, cfodirect/assets/pdf/in-the-loop/sab-74-new-accounting-standards.pdf SAB 74 DISCLOSURES FOR LEASE ACCOUNTING KPMG, ASC 842, Leases Transition Disclosures, RSM, SAB 74 disclosures for new standard on lease accounting, FASB Updated Guidance on ASC 842 FASB, Proposed Accounting Standards Update, Thomson Reuters, Easier Method for Completing Transition to Lease Standard Moves Forward, 14 SAB 74 DISCLOSURE ANALYSIS FOR LEASE ACCOUNTING (ASC 842)

15 TOP 100 US COMPANIES RANKED BY LEASING OBLIGATIONS RANK COMPANY SELECTED DISCLOSURE EXCERPTS 1 Walgreens Boots Alliance The Company will adopt this ASU on September 1, 2019 (fiscal 2020). The Company has begun evaluating and planning for adoption and implementation of this ASU, including selecting a new lease accounting system, evaluating practical expedient and accounting policy elections, and assessing the overall financial statement impact. This ASU will have a material impact on the Company s financial position. The impact on the Company s results of operations is being evaluated. The impact of this ASU is non-cash in nature and will not affect the Company s cash flows. 2 AT&T In February 2016, the FASB issued ASU No , Leases (Topic 842), as modified (ASU ), which replaces existing leasing rules with a comprehensive lease measurement and recognition standard and expanded disclosure requirements. ASU will require lessees to recognize most leases on their balance sheets as liabilities, with corresponding right-of-use assets and is effective for annual reporting periods beginning after December 15, 2018, subject to early adoption. For income statement recognition purposes, leases will be classified as either a finance or an operating lease without relying upon the bright-line tests under current GAAP. Upon initial evaluation, we believe the key change upon adoption will be the balance sheet recognition. At adoption, we will recognize a right-to-use asset and corresponding lease liability on our consolidated balance sheets. The income statement recognition of lease expense appears similar to our current methodology. We are continuing to evaluate the magnitude and other potential impacts to our financial statements. 3 United Continental Holdings The guidance requires lessees to recognize a right-of-use asset and a lease liability for all leases (with the exception of short-term leases) at the commencement date and recognize expenses on their income statements similar to the current Topic 840, Leases. It is effective for fiscal years and interim periods beginning after December 15, 2018, and early adoption is permitted. Lessees and lessors are required to adopt Topic 842 using a modified retrospective approach for all leases existing at or commencing after the date of initial application with an option to use certain practical expedients. We have not completed our evaluation of the impact of the new standard, but believe that it will have a significant impact on our consolidated balance sheets. The new standard is not expected to have a material impact on the Company s results of operations or cash flows. The primary effect of adopting the new standard will be to record assets and obligations for its operating leases. 4 Amazon.com In February 2016, the FASB issued an ASU amending the accounting for leases. The new guidance requires the recognition of lease assets and liabilities for operating leases with terms of more than 12 months, in addition to those currently recorded, on our consolidated balance sheets. Presentation of leases within the consolidated statements of operations and consolidated statements of cash flows will be generally consistent with the current lease accounting guidance. The ASU is effective for reporting periods beginning after December 15, 2018, with early adoption permitted. We plan to adopt this ASU beginning in Q We are currently evaluating the impact and expect the ASU will have a material impact on our consolidated financial statements, primarily to the consolidated balance sheets and related disclosures. TOP 100 US PUBLIC COMPANIES RANKED BY LEASING OBLIGATIONS 15

16 5 New York Community Bancorp 6 Wal-Mart Stores ASU No will require entities that lease assets to recognize as assets and liabilities on the balance sheet the respective rights and obligations created by those leases. ASU No also will require disclosures that include qualitative and quantitative requirements, providing additional information about the amounts recorded in the financial statements. The amendments in this update are effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years, with early application permitted. In transition, lessees and lessors are required to recognize and measure leases at the beginning of the earliest period presented using a modified retrospective approach. The modified retrospective approach includes a number of optional practical expedients that entities we may elect to apply. These practical expedients relate to the identification and classification of leases that commenced before the effective date, initial direct costs for leases that commenced before the effective date, and the ability to use hindsight in evaluating lessee options to extend or terminate a lease or to purchase the underlying asset. An entity that elects to apply the practical expedients will, in effect, continue to account for leases that commence before the effective date in accordance with previous GAAP unless the lease is modified, except that lessees are required to recognize a right-of-use asset and a lease liability for all operating leases at each reporting date based on the present value of the remaining minimum rental payments that were tracked and disclosed under previous GAAP. The transition guidance in Topic 842 also provides specific guidance for sale and leaseback transactions, build-to-suit leases, leveraged leases, and amounts previously recognized in accordance with the business combinations guidance for leases. The Company plans to adopt ASU No effective January 1, 2019 using the required modified retrospective approach, which includes presenting the cumulative effect of initial application along with supplementary disclosures. As a lessor and lessee, we do not anticipate the classification of our leases to change, but we expect to recognize right-of-use assets and lease liabilities for substantially virtually all of our operating lease commitments leases for which we are the lessee as a lease liability and corresponding right-of-use asset on our Consolidated Statements of Condition. The Company has assembled a project management team, formed a working group comprised of associates from different disciplines, such as Vendor Risk Management, Real Estate, and Technology, including working with associates engaged in the procurement of goods and services used in the Company s operations. We have made substantial progress in reviewing contractual arrangements for embedded leases in an effort to identify the Company s full lease population and is presently evaluating all of its leases, as well as contracts that may contain embedded leases, for compliance with the new lease accounting rules. In February 2016, the FASB issued ASU , Leases (Topic 842), which requires lease assets and liabilities to be recorded on the balance sheet. Certain qualitative and quantitative disclosures are also required, as well as retrospective recognition and measurement of impacted leases. The Company will adopt this ASU on February 1, 2019 and is implementing new lease systems in connection with the adoption. Management is still evaluating the effect to the Company s consolidated net income, balance sheet, cash flows and disclosures. Management expects a material impact to the consolidated balance sheet. 16 SAB 74 DISCLOSURE ANALYSIS FOR LEASE ACCOUNTING (ASC 842)

17 7 FedEx On February 25, 2016, the FASB issued a new lease accounting standard which requires lessees to put most leases on their balance sheets but recognize the expenses in their income statements in a manner similar to current practice. The new standard states that a lessee will recognize a lease liability for the obligation to make lease payments and a right-of-use asset for the right to use the underlying asset for the lease term. Expenses related to leases determined to be operating leases will be recognized on a straight-line basis, while those determined to be financing leases will be recognized following a front-loaded expense profile in which interest and amortization are presented separately in the income statement. Based on our lease portfolio, we currently anticipate recognizing a lease liability and related right-of-use asset on the balance sheet in excess of $13 billion with an immaterial impact on our income statement compared to the current lease accounting model. However, the ultimate impact of the standard will depend on the company s lease portfolio as of the adoption date. We are currently in the process of evaluating our existing lease portfolios, including accumulating all of the necessary information required to properly account for the leases under the new standard. Additionally, we are implementing an enterprise-wide lease management system to assist in the accounting and are evaluating additional changes to our processes and internal controls to ensure we meet the standard s reporting and disclosure requirements. These changes will be effective for our fiscal year beginning June 1, 2019 (fiscal 2020), with a modified retrospective adoption method to the beginning of CIT Group Lessor accounting: CIT is analyzing the impact of changes to the definition of initial direct costs under the new guidance. The new standard has a narrower definition of initial direct costs, which will result in CIT recognizing increased upfront expenses offset by higher yield over the lease term. CIT is currently evaluating the bifurcation of certain non-lease components from lease revenue streams. If goods or services are determined to be a non-lease component and accounted for under ASC 606 or other applicable GAAP guidance, the income recognition may differ from current accounting. CIT expects that it will bifurcate certain maintenance components relating to our railcar business. Lessee accounting: CIT is continuing to evaluate the impact of the amended guidance on its Condensed consolidated financial statements. CIT expects to recognize rightof- use assets and lease liabilities for substantially all of its operating lease commitments based on the present value of unpaid lease payments as of the date of adoption. CIT management has assembled a project committee to assess the impact of this guidance. Initial scoping and assessment is complete and CIT is continuing to evaluate the impact on its consolidated financial statements and disclosures. TOP 100 US PUBLIC COMPANIES RANKED BY LEASING OBLIGATIONS 17

18 9 Bank of America Corp. The FASB issued a new accounting standard effective on January 1, 2019 that requires substantially all leases to be recorded as assets and liabilities on the balance sheet. On January 5, 2018, the FASB issued an exposure draft proposing an amendment to the standard that, if approved, would permit companies the option to apply the provisions of the new lease standard either prospectively as of the effective date, without adjusting comparative periods presented, or using a modified retrospective transition applicable to all prior periods presented. The Corporation is in the process of reviewing its existing lease portfolios, including certain service contracts for embedded leases, to evaluate the impact of the standard on the consolidated financial statements, as well as the impact to regulatory capital and risk-weighted assets. The effect of the adoption will depend on the lease portfolio at the time of transition and the transition options ultimately available; however, the Corporation does not expect the new accounting standard to have a material impact on its consolidated financial position, results of operations or disclosures in the Notes to the Consolidated Financial Statements. 10 McDonald s In February 2016, the FASB issued ASU , Leases (Topic 842), to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. Most prominent among the amendments is the recognition of assets and liabilities by lessees for those leases classified as operating leases under current U.S. GAAP. ASU is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years, with early adoption permitted. The Company will adopt the new standard effective January 1, At transition, the Company will recognize and measure leases using the required modified retrospective approach. The Company anticipates ASU will have a material impact to the consolidated balance sheet due to the significance of the Company s operating lease portfolio as described in Leasing Arrangements. The Company will elect an optional practical expedient to retain the current classification of leases, and, therefore, anticipates a minimal initial impact on the consolidated statement of income. The impact of ASU is non-cash in nature; as such, it will not affect the Company s cash flows. 18 SAB 74 DISCLOSURE ANALYSIS FOR LEASE ACCOUNTING (ASC 842)

19 11 Crown Castle International 12 American Tower 13 JPMorgan Chase & Co. In February 2016, the FASB issued new guidance on the recognition, measurement, presentation and disclosure of leases. The new guidance requires lessees to recognize a right-of-use asset and a lease liability, initially measured at the present value of the lease payments for all leases with a term greater than 12 months. The accounting for lessors remains largely unchanged from existing guidance. This guidance is effective for the Company as of January 1, 2019 and is required to be applied using a modified retrospective approach for all leases existing at, or entered into after, the beginning of the earliest comparative period presented. Although early adoption is permitted, the Company does not expect to early adopt the new guidance prior to January 1, With regard to the application of this guidance to the Towers segment, the Company expects that (1) its Towers lessee arrangements will continue to be classified as operating leases under the new guidance; (2) this guidance will have a material impact on its consolidated balance sheet due to the addition of right-of-use assets and lease liabilities for all lessee arrangements with a term greater than 12 months; and (3) there will not be a material impact to its consolidated statement of operations and consolidated statement of cash flows. With regard to the application of this guidance to the Fiber segment, the Company (1) has established and is progressing through the various steps of a crossfunctional project plan to assess the impact of the standard; (2) expects this guidance to have a material impact on its consolidated balance sheet due to the addition of rightof-use assets and lease liabilities for all lessee arrangements with a term greater than 12 months; and (3) continues to assess additional impacts to its consolidated financial statements, including the consolidated statement of operations and the consolidated statement of cash flows. In February 2016, the FASB issued new guidance on the accounting for leases. The guidance amends the existing accounting standards for lease accounting, including the requirement that lessees recognize right of use assets and lease liabilities for leases with terms greater than twelve months in the statement of financial position. Under the new guidance, lessor accounting is largely unchanged. This guidance is effective for fiscal years, and for interim periods within those fiscal years, beginning after December 15, The standard is required to be applied using a modified retrospective approach for all leases existing at, or entered into after, the beginning of the earliest comparative period presented. The Company (i) has established a multidisciplinary team to assess and implement the new guidance, (ii) expects the guidance to have a material impact on its consolidated balance sheets due to the recording of right of use assets and lease liabilities for leases in which it is a lessee and which it currently treats as operating leases and (iii) continues to evaluate the impact of the new guidance. The Firm is in the process of its implementation which has included an initial evaluation of its leasing contracts and activities. As a lessee, the Firm is developing its methodology to estimate the right-of-use assets and lease liabilities, which is based on the present value of lease payments. The Firm expects to recognize lease liabilities and corresponding right-of-use assets (at their present value) related to predominantly all of the $10 billion of future minimum payments required under operating leases as disclosed in Note 28. However, the population of contracts subject to balance sheet recognition and their initial measurement remains under evaluation. The Firm does not expect material changes to the recognition of operating lease expense in its Consolidated statements of income. The Firm plans to adopt the new guidance in the first quarter of TOP 100 US PUBLIC COMPANIES RANKED BY LEASING OBLIGATIONS 19

20 14 Apple In February 2016, the FASB issued ASU No , Leases (Topic 842) ( ASU ), which modifies lease accounting for lessees to increase transparency and comparability by recording lease assets and liabilities for operating leases and disclosing key information about leasing arrangements. The Company will adopt ASU in its first quarter of 2020 utilizing the modified retrospective transition method. While the Company is currently evaluating the timing and impact of adopting ASU , currently the Company anticipates recording lease assets and liabilities in excess of $9.6 billion on its Condensed Consolidated Balance Sheets, with no material impact to its Condensed Consolidated Statements of Operations. However, the ultimate impact of adopting ASU will depend on the Company s lease portfolio as of the adoption date. 15 Baxter International 16 Whole Foods Market Under the new guidance, lessees are required to recognize a right-of-use asset and a lease liability on the balance sheet for all leases, other than those that meet the definition of a short-term lease. This update will establish a lease asset and lease liability by lessees for those leases classified as operating under current GAAP. Leases will be classified as either operating or finance under the new guidance. Operating leases will result in straight-line expense in the income statement, similar to current operating leases, and finance leases will result in more expense being recognized in the earlier years of the lease term, similar to current capital leases. This ASU is effective for the company beginning January 1, The company is currently evaluating the impact of this standard on its consolidated financial statements. The adoption of this ASU will result in a significant increase to the Company s Consolidated Balance Sheets for lease liabilities and right-of-use assets, and the Company is currently evaluating the other effects of adoption of this ASU on its Consolidated Financial Statements. 17 Citigroup In February 2016, the FASB issued ASU No , Leases (Topic 842), which is intended to increase transparency and comparability of accounting for lease transactions. The ASU will require lessees to recognize leases on the balance sheet as lease assets and lease liabilities and will require both quantitative and qualitative disclosures regarding key information about leasing arrangements. Lessor accounting is largely unchanged. The guidance is effective beginning January 1, 2019 with an option to early adopt. The Company does not plan to early adopt the ASU. The Company estimates that upon adoption, its Consolidated Balance Sheet will have an approximate $5 billion increase in assets and liabilities. Additionally, the Company estimates an approximate $200 million increase in retained earnings due to the cumulative effect of recognizing previously deferred gains on sale/ leaseback transactions. 20 SAB 74 DISCLOSURE ANALYSIS FOR LEASE ACCOUNTING (ASC 842)