Lease Update. June 2017 Addison, Texas

Transcription

1 Lease Update June 2017 Addison, Texas

2 William Bill Schneider CPA, CGMA Bill is an Audit Director at AT&T. AT&T delivers advanced mobile services, next-generation TV, highspeed internet and smart solutions for people and businesses. Bill joined BellSouth in 1992, which later became part of AT&T. Previous positions at AT&T and BellSouth include responsibility for Accounting Policy, Sox Compliance, Controller positions at three affiliates, shared services project manager and SEC reporting manager. Prior to joining BellSouth, Bill worked at Deloitte & Touche. Bill graduated from the University of Georgia in 1988 with two degrees, a Bachelor of Business Administration and a Master of Accountancy. Bill is also active in community and professional organizations. Bill s service to the Georgia Society of CPAs culminated in being elected President for the year. Bill was recognized by the GSCPA as its 2011 Outstanding Member in Industry for his contributions to his employer, the profession and the community. After moving to Texas in 2009, Bill joined the Texas Society of CPAs and began serving on several committees including the Professional Standards committee, the Strategic Planning committee and the Business & Industry Committee which he chaired from Bill is the immediate past Chairman of the Dallas CPA Society and is serving on the TSCPA Executive Board in Bill has served the CPA profession in a variety of roles at the American Institute of CPAs including being on Council from , the AICPA Business and Industry Executive Committee from , the AICPA Risk Management and Internal Control Advisory council from and the AICPA Board of Directors Bill extended his work for the profession internationally by serving on the International Federation of Accountants (IFAC) Professional Accountants in Business Committee beginning in 2012 as the AICPA representative. Bill also served on the COSO Advisory Council on the revision of the Internal Control Integrated Framework as the AICPA representative from 2011 through 2013, and currently serves on the AICPA Revenue Recognition Implementation Task Force for the Telecommunications Industry.

3 Acknowledgements My thanks to KPMG and BDO who provided information used in this presentation.

4 Polling Question Where are you in your implementation of the leasing standard? A. We showed off by adopting early B. We re ready, just biding the time until 2019 C. We re working on implementing a new system D. We re still evaluating the standard and gathering information E. What new leasing standard?

5 Identifying a Lease A contract, or part of a contract, that 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 Determine at inception based upon: Whether contract fulfillment depends on use of an identified asset* Whether contract conveys right to control use of identified asset for consideration for a time period Consider whether supplier has substantive right of substitution

6 Identifying a Lease Right to control use of the identified asset depends upon: Right to obtain economic benefits from the use of the identified asset (e.g., through using, holding, or subleasing the asset). - Economic benefits is fairly broad - Consider within defined scope of customer s contractual right to use the asset Right to direct the use of an identified asset. This exists when customer has the right to direct how and for what purpose the asset is used, including the right to change how and for what purpose the asset is used, throughout the period of use.

7 Right to direct the use of the asset Rights in the contract Example rights to direct how and for what purpose asset is used throughout period of use Other rights Right to change type of output produced WHAT Right to change when output is produced WHEN Supplier protective rights Maintaining the asset Right to change where output is produced WHERE Right to change whether output is produced and, if so, quantity produced WHETHER & HOW MUCH Insuring the asset Operating the asset (*)

8 Lease Term Estimated as the non-cancellable period of the lease Include periods under option to extend IF lessee is reasonably certain to exercise option Include periods under option to terminate IF lessee has is reasonably certain NOT to exercise option Same analysis for purchase options Reasonably certain is a high threshold substantially the same as reasonably assured in existing U.S. GAAP. Includes assessment of economic incentives. Reassess the lease term only upon the occurrence of a significant event or change in circumstances that are within the control of the lessee.

9 Lease Payments Split lease and non-lease payments Fixed lease payments (less incentives to be paid by lessor) Variable payments tied to an index Variable payments which are in-substance fixed payments Residual value guarantees (probable amount) Exercise price of purchase option IF lessee is reasonably certain to exercise option Termination penalties IF lease term reflects lessee exercising option

10 Lease Payments Variable payments: Day 1 - include index-based payments (e.g., CPI escalator) measurement based on the rate at commencement. Day 2 - only reassess when the lease liability is reassessed for other reasons (e.g., contract modification). Otherwise, changes in the index are period expenses. In-substance fixed payments are included in Day 1 lease liability, consistent with current practice. Discount rate - use the rate implicit in the lease if determinable, otherwise use incremental borrowing rate.

11 Lease classification test Transfer of ownership test Does the lease transfer ownership of the underlying asset to the lessee by the end of the lease term? Yes Lessee purchase option test Does the lease grant the lessee a purchase option of the underlying asset that the lessee is reasonably certain to exercise? No Yes Lease term test Is the lease term for a major part of the remaining economic life of the underlying asset? 1 No Yes Finance lease Present value test Does the present value of the sum of (1) lease payments and (2) lessee residual value guarantee not reflected in lease payments, equal or exceed substantially all of the underlying asset s fair value? No Yes No Alternative use test Is the underlying asset of such a specialized nature that it is expected to have no alternative use to the lessor at the end of the lease term? Yes No Operating lease 1 If the commencement date is at or near the end of the underlying asset s economic life, this test does not apply.

12 Thresholds for lease classification tests Threshold Major part of the remaining economic life of the asset Substantially all of the fair value of the underlying asset At or near the end of the economic life of the asset Permitted bright line 75% = a major part 90% = substantially all 25% of the total life = at or near the end

13 Lease Accounting Financing Lease Recognize right-of-use asset Recognize lease liability Recognize separately on income statement Interest expense Amortization of asset Operating Lease Recognize right-of-use asset Recognize lease liability Recognize single amount of lease expense on income statement (combine interest and amortization)

14 Short-Term Leases Two criteria for short-term leases: Lease term of 12 months or less No option to purchase underlying asset that lessee is reasonably certain to exercise If short-term lease, lessee can elect not to apply recognition requirements (no balance sheet gross-up for ROU asset and related lease liability) Recognize lease payments in P&L on straight-line basis Recognize variable lease payments as they are incurred Accounting policy must be made by class of underlying asset and be disclosed

15 Lessor Sales-Type leases Derecognize the underlying asset; recognize lease receivable and residual asset Recognize any selling profit at the commencement date; recognize interest income over the lease term Direct Financing leases Derecognize the underlying asset; recognize lease rcvbl, residual asset & deferred selling profit Recognize selling profit over lease term (immediate loss); recognize interest income over the lease term Operating leases (Continue to) Recognize the underlying asset Recognize lease income over the lease term

16 Lessee Disclosures Contractual details (lease term, contingent rentals, options, etc.) and related accounting judgments Information about significant leases that have not yet commenced Information about liabilities, expense and cash flows - operating and finance leases separately: Maturity analyses of undiscounted lease payments Weighted-average remaining lease term Weighted-average discount rate Cash flows and supplemental noncash information If practical expedients related to short-term leases and separation of lease and non-lease components elected, disclose that fact and related details

17 Lessor Disclosures Contractual details (lease term, contingent rentals, options, etc.) and related accounting judgments Narrative disclosures about leases (including information about variable lease payments and options) Tabular presentation of: Profit or loss at commencement (sales-type and direct financing) Interest on receivables and residual assets (sales-type & direct financing) Lease income (operating) Maturity analysis of lease receivables (sales-type and direct financing) or lease payments (operating) Narrative disclosure about risk management for residual assets

18 Transition Transition approach Package of practical expedients (all or nothing) Use of hindsight (elect on its own or with the package of practical expedients) Apply a modified retrospective transition approach: Restate all comparative periods presented No revisions to the accounting for leases that expired prior to date of initial application An entity may elect not to reassess: Whether expired or existing contracts contain leases under the new definition of a lease; Lease classification for expired or existing leases; and Whether previously capitalized initial direct costs would qualify for capitalization. Hindsight allowed when considering lessee options to extend or terminate a lease or purchase the underlying asset, and in assessing the impairment of rightof-use assets

19 Transition Sale-leaseback transition No reassessment of initial sale/leaseback conclusions Specific transition for deferred gains (or losses) related to capital or operating leases

20 Implementation Considerations Developing a plan for implementation, including impacts on: ICFR Planning and budgeting Taxes Compensation arrangements Debt covenants and other contracts Internal and external communication IT systems/data management Lease structure strategy

21 What do I do First? Inventory existing leases what is the source for your five-year maturities table? Determine existing system resources Do you currently use a lease management system? Does that system currently have the ability to account for rent expense on a straight-line basis (whether or not you are using it)? Have you talked to the vendor about their plans to become compliant with the new standard?

22 What do I do Next? If no system in place, determine whether you need to implement one How many leases do you have, and how complicated are their terms? Consider: - Other stakeholders (facilities management, etc.) - Budget constraints Investigate potential solutions If system in place, begin working with vendor on transition plan

23 Thank You