Leases ASU September 20, 2017

Transcription

1 Leases ASU September 20, 2017

2 Meet the Speakers Tonisha Spratte, CPA Senior Accountant Cherry Bekaert Matthew Mars Senior Accountant Cherry Bekaert

3 Agenda What is a Lease? What are the Lease Classifications? How do we initially Recognize a Lease? Subsequent Measurement Disclosures 3

4 It Started with a Dream My dream is that one day I ll fly on an airplane that is on an airline balance sheet. -Sir David Tweedie, IASB Chair 4

5 Its all about Good Intentions: 1. Improve Financial Reporting about Leasing Transactions 2. Comparability to IFRS 5

6 A quick history lesson In 1974, there were only $11B in operating leases In 1975, it was up to $100B (after FAS 13 was adopted) As of 2015, operating leases make up over $3T and comprise 88% of all leases

7 Definition 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.

8 Control Substantially all of the economic benefits Right to direct the use

9 Considerations Substantive Substitution Rights Protective Rights 9

10 Not in Scope Intangible assets Nonregenerative resources Biological assets Inventory

11 Steps Step 1 - Determine whether a contract contains a lease Step 2 - Identify the separate lease components within the contract Steps 3 - The consideration in the contract shall be allocated to each separate lease component and nonlease component of the contract

12 Lease Classification Classify each separate lease component at the commencement date. Do not reassess the lease classification after the commencement date unless the contract is modified and the modification is not accounted for as a separate contract

13 Lease Term Noncancellable period Option to terminate Option to extend

14 Capital Lease Accounting Current (ASC840) 1. Transfer of ownership 2. Bargain purchase option 3. Lease term >=75% of useful life 4. PV of min. payments >=90% of FV

15 Financing Lease - New Transfer of ownership Option to purchase is reasonably certain Lease term is a major part of the economic life Asset is specialized in nature PV of lease payments is substantially all of the FV

16 Operating Lease Any lease other than a finance lease

17 Transition Modified retrospective approach Practical expedients 17 Continue to account for leases that commence before the effective date in accordance with previous GAAP unless the lease is modified Exception - Required to recognize a right-of-use asset and a lease liability for all operating leases based on remaining minimum rental payments that were tracked and disclosed under previous GAAP

18 Recognition Lease Liability Right-of-use asset

19 Lease Liability PV of lease payments Fixed payments Exercise price of options Penalties Residual value guarantees Certain variable lease payments Optional periods Purchase price

20 Do Not Include Certain variable lease payments Guarantee of the lessor s debt Nonlease components

21 Discount Rate Rate implicit in the lease Incremental borrowing rate Risk Free Rate

22 Asset Recognition Lease liability Prepayments Lease incentives Initial direct costs

23 Short-Term Leases A lease that, at the commencement date, has a lease term of 12 months or less and does not include an option to purchase the underlying asset that the lessee is reasonably certain to exercise.

24 Finance Lease

25 Income Statement Amortization of ROU Asset Straight line Shorter of economic life or lease term Exception ownership transfer or option to purchase

26 Income Statement Interest Expense Discount Rate * Lease Liability Interest decreases over time Principal pay down increases over time Expense payments not included in the liability

27 Example Financing ROU Asset Lease Liab $ XXX $ XXX At inception Amort Exp Accum Amort Amortized ROU Amortized ROU Lease Liab Interest Exp Cash Year 1 Actual less interest Rate x Liab Actual

28 Balance Sheet Right of Use Asset Lease Liability Net of amortization Test for impairment Increases with accrual of interest Decreases with lease payment 28

29 29 Operating Lease

30 Income Statement Single Lease Cost Calculate interest (liability * discount rate) Calculate amortization (lease payment interest) Charge interest and amortization to lease expense No charge to interest and amortization Expense variable lease payments not included in liability

31 Example Operating ROU Asset Lease Liab $ XXX $ XXX At inception Lease Expense Lease Liab Accum Amort Cash Year 1 Amortized asset Actual less interest Plug Actual

32 Balance Sheet Right of use asset Amortized (lease payment interest calc) Increasing amortization Test for impairment Lease Liability Increase with interest calculation Decrease with payment

33 Summary

34 Comparison Financing Lease Operating Lease Initial Recognition (Right of use asset & Lease liability) Income Statement Asset Accretion PV of lease payments Interest expense Amortization (depreciation) expense Amortization/depreciation (ex. straight-line) PV of lease payments Straight-line Lease expense Liability Accretion Interest method Interest method Lease expense less interest expense

35 Presentation Present finance lease right-of-use assets and operating lease right-of-use assets separately from each other and from other assets Present finance lease liabilities and operating lease liabilities separately from each other and from other liabilities

36 Qualitative Lessee Disclosures Nature of leases Information about leases not yet commenced Significant assumptions and judgments Terms and conditions of sale-leaseback transactions Leases between related parties Short-term lease exemption policy Use of practical expedient *Items in orange indicate new disclosure requirement

37 Quantitative Lessee Disclosures Finance, Operating, Short-term and Variable lease costs Sublease income Net gains (losses) on sale-leaseback transactions Supplemental noncash info on lease liabilities from obtaining ROU assets Weighted average remaining lease term and discount rate 5-year Maturity analysis Cash paid for amounts included in measurement of lease liabilities *Items in orange indicate new disclosure requirement

38 Is Doomsday Upon Us? According to Chang & Adams Consulting, the new standard could have the following effects: Increase public company liabilities by $1.5T Increase costs by $10.2B / yr Potential job losses of 190,000 Lower US GDP by $27.5B / yr

39 When do I have to do anything? Public Entities FYB > 12/15/18 All other Entities FYB > 12/15/19 Early adoption is permitted

40 Questions & Comments? Tonisha Spratte Senior Assurance Services Matthew Mars Senior Assurance Services