ManagePath: Your Solution for the New Lease Accounting Rules

Transcription

1 ManagePath: Your Solution or the New Lease Accounting Rules

2 ManagePath: Your Solution or the New Lease Accounting Rules CONTENTS Key Changes The ManagePath Solution Determining the Lease Term Lease Liability Calculation Measurement o the Right-o-Use Asset Lease Classiication How Will the Lease Accounting Changes Impact Your Processes How Do the Provisions Compare with IFRS

3 We Are Ready For You Fischer s lease administration and lease accounting solution, ManagePath, is ready to address these changes or your business without skipping a beat. ManagePath has been reconigured and updated to include advanced unctionality that will enable you to bridge the gap between standard accounting systems and the speciic needs o your real estate department, working with the new FASB/IASB regulations. March 2009 Initial Discussion Drat May nd Exposure Drat December 15th, 2018 Eective Date o FASB Standard or Subsequent Reporting Periods August st Exposure Drat February 26th, 2016 FASB Final Standard (ASC 842) Issued

4 Make audit-proo decisions Key Changes Real Estate and Equipment Leases will now impact company s balance sheets Eective Date or changes December 15, 2018 onwards Requires two year look-back period The lease will be recognized by two entries: Right-o-Use Asset Lease Liability FASB will classiy two dierent lease types: Operating Leases Finance Leases The liability associated with an Operating Lease will not be treated as debt but as an operating obligation and will not aect a company s ability to borrow The liability arising rom a Finance Lease is considered debt

5 ManagePath Solutions Automatically determine lease types Calculate the right-o-use asset and lease liabilities Generate journal entries Easily handle operating and inance lease calculations Execute mass updates to your existing schedules Track one-time and recurring charges or AP and AR Have automatic generation o space allocation or business unit-speciic GAAP schedules Automate GAAP reporting and deerred rent process Have dual support or FASB and IASB reporting Eiciently manage rent payments and GAAP treatments through the entire lease liecycle

6 Determining the Lease Term The calculation o the Liability & Asset amount starts on: Lease commencement date or a new lease On the date a renewal option is executed (not the renewal date) or a renewal period The lease term will include renewal options that are reasonably certain to be exercised However reasonably certain is considered a high threshold to meet Companies will develop their own criteria to gauge what option they consider reasonably certain to exercise Leases o 12 months or less are excluded rom the requirements o the new standards

7 Lease Liability Calculation Lease Liability is calculated taking the present value o outstanding lease payments The discount rate used is either the implicit interest rate in the lease or the lessee s incremental borrowing rate Excludes operating (or non-lease) expenses Excludes variable lease payments Operating expenses can be estimated but i splitting payments is too complex then gross payments can be used However, ixed property tax and insurance payments included in gross rents and paid by the landlord will be included For ixed index changes the current index value will be used throughout the lease i.e. a lease with uture CPI increases will be calculated at today s rate o CPI even i there are multiple CPI adjustments

8 Measurement o the Right-o-Use Asset Right-o-Use asset is calculated: Starting with the Capitalized Lease Liability Adjusted or Initial Direct Costs: Allowances Prepayments beore commencement date Incentive payments Costs associated with securing the lease/property Adjusted or Impairments

9 Lease Classiication A lease is a Finance Lease i one o the ollowing is true: The lessee has the right to acquire all or part o the underlying asset ater the lease expires. The lessee has a purchase option they re reasonably certain to exercise. The Lease Liability is greater than 90% o the Asset Fair Value at inception. The lease term last longer than 75% o the Remaining Economic Lie o the asset. The asset s specialized nature would prohibit alternative use to the lessor at lease expiration. I none o them apply then the lease is an Operating Lease. Essentially the same tests as the old Capital Lease classiication.

10 How the Lease Accounting Changes Impact Your Processes Notiying Finance o New Locations, Renewals, Dispositions, and Terminations. When renewing a lease, the updated schedule will commence on the execution date o the renewal as opposed to eective date o the renewal period. Real Estate will be required to gather estimates or non-base rent components o gross leases to deduct them rom overall lease obligation. Tenant Improvement Allowances, prepayments, landlord incentives, and other costs will impact the Asset side o the balance sheet. Finance will also need a system to track equipment leases to run the same calculations as real estate leases.

11 How the Provisions Compare with IFRS All US based companies will report based upon FASB requirements while international entities will most likely all under IASB Regulations. There are a ew key dierences: Lease Type: FASB Finance or Operating Lease IASB All leases are treated as Finance Leases Index Increases: FASB Only restate increases i other changes occur at the lease IASB Required to restate increases when increases become eective Low Value Lease Exclusion FASB Still unclear on how to exclude low value leases IASB Can exclude any lease with a total obligation o $5,000 or less Companies with oreign based entities will have to report on both FASB and IASB requirements

12