Right of Use Lease Accounting

Transcription

1 Click to edit Master title style Right of Use Lease Accounting A Data-driven Future RICHARD KLOSTER SWARS FALL MEETING, DALLAS, TX SEPTEMBER W. 31st St. Suite 200 Downers Grove IL AllTranstek.com

2 Click Q: What s to edit ROU Master accounting? title style A: All leases go on the balance sheet FASB 13 will be gone. New accounting standard: ASC 842 and IFRS 16 Adopt at January 1, 2019 All IFRS companies Publicly traded US GAAP companies The new FASB standard affects all companies and organizations that lease property, plant, or equipment that is, land and/or depreciable assets. Leased assets covered by the FASB standard include airplanes, trucks, rail cars not in car hire contracts, cruise ships, and manufacturing and construction equipment What s new: All leases with greater than one year term are capitalized on lessee company balance sheets. IFRS: All leases are finance leases. US GAAP: Leases are either finance leases or operating leases. What s new: All operating leases become Right of Use liabilities on lessee company balance sheets. Why this matters: operating lease liability is there for all to see! 2018 COPYRIGHT ALLTRANSTEK, L.L.C. 3

3 Click ROU Accounting to edit Master will title impact style 47% of N. A. railcar fleet Finance Lease 5% All Railcars Operating Lease Railcars Detail Shipper 19% Tank 40% TTX 10% Operating Lease 47% Covered Hopper 41% Gondola 9% Railroad 19% Source: UMLER, AllTranstek; Total population 1,662,949 railcars Flat Car 1% Box 4% Open Top Hopper 6% 2018 COPYRIGHT ALLTRANSTEK, L.L.C. 4

4 Click The Old to edit World Master looks title like style this operating leases disclosed in Footnote 23 on page 123 of a 10K 23. Leases We have operating leases for certain property and equipment under various noncancelable agreements, the most significant of which are rail car leases and barge tow charters for the distribution of our products. The rail car leases currently have minimum terms ranging from one to eleven years and the barge charter commitments range from approximately one to seven years. We also have terminal and warehouse storage agreements for our distribution system, some of which contain minimum throughput requirements. The storage agreements contain minimum terms generally ranging from one to five years and commonly contain automatic annual renewal provisions thereafter unless canceled by either party. Future minimum payments under noncancelable operating leases with initial or remaining noncancelable lease terms in excess of one year as of December 31, 2017 are shown below. Operating Lease Payments (in millions) 2018 $ Thereafter 76 $ 376 Total rent expense for cancelable and noncancelable operating leases was $125 million for 2017, $111 million for 2016 and $100 million for Leasing is easy Perhaps no budget authority required Some financial oversight No standard analysis of lease- adjusted financials Off balance sheet is a selling point! COPYRIGHT ALLTRANSTEK, L.L.C. 5

5 Click Balance to edit Sheet Master Impacts title Old style v. New Old World New World Tot Liabilities up 2.38x Balance Sheet 75% larger Source: GAAPology.com 11/15/16 Leases will be visible and have a big financial impact! 2018 COPYRIGHT ALLTRANSTEK, L.L.C. 6

6 Click We can t to edit avoid Master it here title style is some jargon used in the ASC 842 standard Lease component = the financing part of the lease payment Non-lease component = the maintenance and repair a/k/a service part of the lease payment Observable standalone pricing Relative standalone pricing Practical expedient 2018 COPYRIGHT ALLTRANSTEK, L.L.C. 7

7 Click New accounting to edit Master standards title will style change the capitalization and treatment of operating leases A LEASE IS A CONTRACT WHERIN ONE PARTY GIVES ANOTHER PARTY THE RIGHT TO POSSESS AND USE ITS PROPERTY OR EQUIPMENT FOR A TIME FINANCE LEASE Lessee s purchase option likely to be used Transfer of ownership at end of term A term equal to major part of remaining economic life of the equipment PV of the lease payments equals or exceeds substantially FMV of equipment No bright lines unlike FASB 13 Very similar to current accounting standard for finance a/k/a capital leases OPERATING LEASE Lease that does not meet any of the criteria for a finance lease Operating leases have not appeared on the balance sheet of the lessee; however, lease obligation was required to be disclosed as footnote to financial statements Changed by new accounting standards 2018 COPYRIGHT ALLTRANSTEK, L.L.C. 8

8 Click The Right to edit of Master Use Liability title style and Right of Use Asset, Balance Sheet Impact Required: Every lease with 12 month + term will be recorded on the lessee s balance sheet as both an asset and a liability. Comment: substance trumps form to determine the term No rolling 11 month leases If renewal is likely, the term is deemed the base term plus renewal term. A ROU liability for lessee s lease obligation (measured at the present value of the future lease payments over the lease term.) An ROU asset for lessee s right to use the underlying asset equal to the lease liability, plus lease payments made at or before lease commencement, lease incentives, and other initial direct costs. Comment: ROU asset is expected to be greater than the ROU liability 2018 COPYRIGHT ALLTRANSTEK, L.L.C. 9

9 Click Implementing to edit Master ROU Accounting the title style Data Challenge Data is required to answer these questions: Is this agreement a lease? Data required: the agreement document and schedules and amendments and riders Who is the lessor? If it is a lease, is it a finance lease or an operating lease? Data required: equipment cost at lease inception, remaining useful life of equipment, expected Fair Market Value at lease maturity Calculate the Right of Use Asset and Liability Data required: o term of the lease; is the lease likely to be renewed? o What is the rent? How often is it paid? Advance or arrears? o is there a renewal term? o If there is a renewal term, is there a specified renewal rent? o What is the lessee s incremental borrowing rate? (this is the discount rate for the ROU calculation) 2018 COPYRIGHT ALLTRANSTEK, L.L.C. 10

10 Click Where to does edit Master this Data title come style from? INTERNAL SOURCES EXTERNAL SOURCES Legal Accounting Appraisers Organization Impact Data Gathering Supply Chain/Transportation/ MMgt Lessors Auditors Financial Planning/Budgets Treasury Legal Counsel Consultants 2018 COPYRIGHT ALLTRANSTEK, L.L.C. 11

11 Click Implementation to edit Master Timeline: title style 6 to 11 months Prepare, formalize, evaluate Take action now and prepare Formalize task force Evaluate Impact beyond accounting Find hidden opportunities Time Effort Lease portfolio Future system needs ILLUSTRATIVE LEASING TIMELINE Data preparation Roadmap Implementation (1-2 months) (2-3 months) (3-6 months) Lease sample review, determine requirements, lease operation model Data strategy + data analysis Detailed requirements, definition and roadmap Lease management software selection lease population completeness procedures Source: PWC Lease Accounting Implementation System design Extract relevant data Construct + Implement Project Management, Change Management, Training Operate + Review 2018 COPYRIGHT ALLTRANSTEK, L.L.C. 12

12 Click After to the edit Data Master is gathered, title style then what? Acquire a lease accounting software package (use technology) facilitate data gathering to input the data gathered make the ROU calculations use the software to keep up to date Decide whether to use the practical expedient or separate the rent payment into the lease and non-lease component. Is it worth it? Be in compliance with the new ROU lease accounting standard 2018 COPYRIGHT ALLTRANSTEK, L.L.C. 13

13 Click Are you to edit going Master through title and style this effort and expense just to be in compliance with ASC 842 or IFRS 16? This is data driven drudgery right now and near future (Jan or Jan. 2020) 2018 COPYRIGHT ALLTRANSTEK, L.L.C. 14

14 Click Let s do to edit something Master with title the style data now that we ve got it. $ 2018 COPYRIGHT ALLTRANSTEK, L.L.C. 15

15 Click From to data-driven edit Master drudgery title style to opportunity and exploitation Example: Leased-in railcar fleet for a major shipper Public company-- a statement of risk factors, operations, markets, etc. in the SEC filings Transportation cost is a high percentage of the delivered cost of raw materials and the finished product. From the data gathered for the ROU Lease accounting project risk analysis Observations: o More than 50% of the leases with one lessor o More than 45% of the railcars leases renew in the same 12 month period o Railcars identified in the SEC filings as strategically important to the company s business are not owned by it. They are leased, and thus not in the company s control. o The same railcars have been leased for years under multiple renewals COPYRIGHT ALLTRANSTEK, L.L.C. 16

16 Click to edit Master title style Concentration risk with one lessor Market risk due to renewal concentration in 12 months Renewal and availability risk for strategic car types Overall exposure to market fluctuations in rent which directly impact transportation cost, and indirectly impact operating profit margins. So what are the risks? 2018 COPYRIGHT ALLTRANSTEK, L.L.C. 17

17 Click to edit Master title style Reassess: lease tactics railcar procurement finance strategy Opportunity to mitigate risk 2018 COPYRIGHT ALLTRANSTEK, L.L.C. 18

18 Click Lessee to accounting edit Master for title full service style railcar leases a typical full service lease Lessor provides railcars to lessee to be used ( controlled ) by lessee for the term of the lease subject to certain terms and conditions. Relevant terms and conditions: Lessor pays for maintenance and repair expenses, subject to some exclusions. Lessor can substitute a more or less identical railcar for another if the former is uneconomical to repair. Lessor covers property taxes and insurance Term of the lease is much less than the remaining useful of the railcars. Lessee has no right to buy the railcars at any time. Lessee pays fixed payment to lessor to use the railcars and for the services the lessor provides Is this a lease? YES Is this an operating lease? MOST LIKELY, YES 2018 COPYRIGHT ALLTRANSTEK, L.L.C. 19

19 Click Challenges to edit and Master opportunities title style for ROU accounting of full service leases Opportunity: Reduce the ROU impact on the balance sheet by determining the lease component and non-lease component. It is permitted to use only the lease component to calculate the ROU instead of the entire lease payment. OR Use the practical expedient and discount the entire lease payment to calculate the ROU. Your company s financial and accounting policy drives the choice.but the choice has to apply to the whole asset class. In other words, to all your leased-in railcars 2018 COPYRIGHT ALLTRANSTEK, L.L.C. 20

20 Click Challenges to edit and Master Opportunities title style for ROU accounting of full service leases Challenge: Determining the non-lease components Property taxes and insurance paid by lessor are not relevant this is deemed a cost of ownership independent from any lease. There are no goods or service transferred to the lessee. Maintenance and repair costs to keep the railcars in good order are relevant this is the service component embedded in the full service lease payment. Service component of the rental payment is not a separately identified fee. Challenge: How to determine the service component if it is not disclosed? A solution? Use the observable standalone selling price for maintenance and repair services for identical railcars COPYRIGHT ALLTRANSTEK, L.L.C. 21

21 Click to edit Master title style How AllTranstek can help FASB EXPECTS LESSEES TO MAKE THE ALLOCATION BETWEEN THE LEASE COMPONENT AND SERVICE COMPONENT OF THE LEASE TO MINIMIZE THE ROU LIABILITY. [Source: ASU BC150] Lease Component a/k/a Finance Cost Non-Lease Component a/k/a Maintenance Cost Full Service Lease Payment Alltranstek s database of maintenance and repair records offers a solution 2018 COPYRIGHT ALLTRANSTEK, L.L.C. 22

22 Click to edit Master title style It depends. Is it material to the balance sheet? Data provides an alternative to the practical expedient. Data provides guidance for decisions about the railcar fleet Is it better to net lease railcars or own them and take over maintenance and repairs? Are there opportunities to reduce M&R expenses? Is it worth the effort to avoid the practical expedient? 2018 COPYRIGHT ALLTRANSTEK, L.L.C. 23

23 Click to edit Master title style Hypothetical Full Service Lease 500 Railcars PRACTICAL EXPEDIENT IDENTIFY NON-LEASE COMPONENTS Base Term Renewal Term Base Term Renewal Term Rent (Mo. in Adv.) $650 $450 Term (Months) Lease Component $650 $450 Full Service Lease Payment/Yr $ 325,000 Total Cash Outflow: $ 15,600,000 $ 8,100,000 Incremental Borrowing 3.5% 3.5% Rate/Annum Base Term ROU Liability at Base Term Commencement Renewal Term ROU Liability at Base Term Commencement $14,579, $6,696, Rent (Mo. in Adv.) $650 $450 Term (Months) Lease Component $520 $328 Full Service Lease Payment/Yr $ 325,000 Total Cash Outflow: $ 15,600,000 $ 8,100,000 Incremental Borrowing Rate/Annum Base Term ROU Liability at Base Term Commencement Renewal Term ROU Liability at Base Term Commencement 3.5% 3.5% $11,663, $4,882, Total ROU Liability at Commencement $21,276, Total ROU Liability at Commencement $16,546, COPYRIGHT ALLTRANSTEK, L.L.C. 24

24 Click Implications to edit Master procurement title styleand finance strategy envision the future Lease vs. Buy Strategic considerations Lease vs. buy evaluation Negotiation of contract terms Purchasing and divestiture Lease Strategy Lease term negotiation Lease agreements 2018 COPYRIGHT ALLTRANSTEK, L.L.C. 25

25 Click to edit Master title style Closing Comments In My Opinion Go beyond the drudgery of data gathering for accounting compliance purposes. ROU accounting data is available to assess and mitigate the risks to the lessee of its historical railcar leasing activity. M&R data is available to find opportunities to reduce the costs of the lessee s railcar fleet. Data is available to discuss of the number of railcars used and how they are procured. ROU accounting is a work in progress. How will the capital market will react? The new rules will change the financial appearance of companies. Will some try to restructure leases into service contracts? Leases soon to be visible on the balance sheet as ROU liabilities and assets will attract greater attention. Now armed with data that was ignored or not available before ROU, how much will the the behavior of market participants change? 2018 COPYRIGHT ALLTRANSTEK, L.L.C. 26

26 Click to edit Master title style Appendix RIGHT OF USE LEASE ACCOUNTING: A DATA-DRIVEN FUTURE 2018 COPYRIGHT ALLTRANSTEK, L.L.C. 27

27 Click An example: to edit Master 10 year title operating style lease Lessee s Incremental Borrowing Rate = 6% A B=A-C C D=E-C E F G Initial Direct Costs $ 10, $7,360, $7,370, Period 1 $ 1,000, $ 558, $441, $ 559, $ 1,001, $6,801, $6,810, Period 2 $ 1,000, $ 591, $408, $ 592, $ 1,001, $6,209, $6,217, Period 3 $ 1,000, $ 627, $372, $ 628, $ 1,001, $5,582, $5,589, Period 4 $ 1,000, $ 665, $334, $ 666, $ 1,001, $4,917, $4,923, Period 5 $ 1,000, $ 704, $295, $ 705, $ 1,001, $4,212, $4,217, Period 6 $ 1,000, $ 747, $252, $ 748, $ 1,001, $3,465, $3,469, Period 7 $ 1,000, $ 792, $207, $ 793, $ 1,001, $2,673, $2,676, Period 8 $ 1,000, $ 839, $160, $ 840, $ 1,001, $1,833, $1,835, Period 9 $ 1,000, $ 889, $110, $ 890, $ 1,001, $943, $944, Period 10 $ 1,000, $ 943, $56, $ 944, $ 1,001, $0.00 $0.00 Column F is reduced by periodic principal payment B Column G is reduced by periodic amortization accrual D 2018 COPYRIGHT ALLTRANSTEK, L.L.C. 28

28 Click An Example: to edit Master Allocating title style the Full Service Lease Payment for 500 Railcars Allocating Lease Components Base Term Allocation: Base Term Allocation: Likely Renewal Term Renewal Term Allocation Term (Months) Full Service Lease Payment/Mo. $ 650 $ 450 Making the Allocation: Step I: Observable Standalone Selling Prices Percent of Total Percent of Total Lease Component $ 12,480,000 80% $ 5,906,250 73% Service (Mnt & Repair) Component $ 3,000,000 19% $ 2,109,375 26% Other Expenses Component: $ 120,000 1% $ 84,375 1% Standalone Prices over Term $ 15,600, % $ 8,100, % Step 2: Relative Standalone Selling Prices: Lease Component $ 520 $ 328 Service (Mnt & Repair) Component $ 125 $ 117 Other Expenses Component: $ 5 $ 5 Allocated Full Service Lease Payment $ 650 $ COPYRIGHT ALLTRANSTEK, L.L.C. 29

29 Click to edit Master title style Proposed AllTranstek product that assists customers Customer provides data: AAR car type code Mechanical features Cubic capacity or gallons Age Mileage (if available) Commodity AllTranstek Output: PCPM maintenance and repair expense: low, median, average and high AllTranstek data is based on actual repair events and prices Aggregated to standard fleet segments 2018 COPYRIGHT ALLTRANSTEK, L.L.C. 30

30 Click to edit Master title style AllTranstek has the maintenance data you need. AllTranstek can provide maintenance and repair data from its database with a few inputs ALLTRANSTEK LEASEWATCH Maintenance and Repair Expense Calculator ILLUSTRATIVE DATA ENTRY MAINTENANCE TRENDS AND COSTS INPUT DATA: DATE: 3/15/2018 Enter 15th of current month Instructions 10 YEARS OF DATA AAR CAR TYPE CODE: C114 Enter as X### CUBIC CAPACITY: 5,500 Enter as ####; if not applicable, leave blank GALLON CAPACITY (liquid): Enter as ####; if not applicable, leave blank YEAR BUILT: 1995 Enter as ####; if not applicable, leave blank MILES PER YEAR: 20,000 Enter as #####; if not applicable, leave blank MOST USED COMMODITY: soybean Enter commodity group name COMMODITY STCC Enter STCC code BY CAR TYPE SEGMENT MILLIONS OF RECORDS CANCEL RESET SUBMIT 2018 COPYRIGHT ALLTRANSTEK, L.L.C. 31

31 Click to edit Master title style data that has been assessed using statistical methods and practices ALLTRANSTEK LEASEWATCH Maintenance and Repair Expense Calculator AAR CAR TYPE CODE: C114 CUBIC CAPACITY: 5,500 GALLON CAPACITY (liquid): YEAR BUILT: 1995 MILES PER YEAR: 20,000 MOST USED COMMODITY: soybean COMMODITY STCC ILLUSTRATIVE REPORT DATE: 3/30/2018 Range of Maintenance and Repair Expenses (USD PCPM) No. of Age Bucket No. of Railcars Reported Events Reported Low Median Average High $ $ $ $ REPORT POTENTIAL USERS Accounting firm Lessee administrator Treasury department Railcar investor Note: PCPM = $ per car per month Note. Output report is in its conceptual stage and may vary from the illustration COPYRIGHT ALLTRANSTEK, L.L.C. 32

32 Click to edit Master title style Questions? q Dick Kloster q q kloster@alltranstek.com q Jerry Charaska q q jcharaska@alltranstek.com 2018 COPYRIGHT ALLTRANSTEK, L.L.C. 78