Lessr Presentatin & Disclsure Requirements The public entity 1 adptin deadline fr the new guidance in Accunting Standards Update (ASU) 2016-02, Leases (Tpic 842), is drawing clser. This is the first majr verhaul f lease guidance since 1973 and implementatin and dcumentatin will be substantial undertakings fr entities in all industries with significant lease activity. The effect n each cmpany will depend n the nature and vlume f its leases. The updates are mre significant fr lessees; hwever, changes were made t the lessr accunting mdel t align it with changes t the lessee mdel and the new revenue recgnitin standard, mst ntably fr sale leaseback transactins. Feedback frm early adpters has prmpted the Financial Accunting Standards Bard (FASB) t cnsider additinal relief. FASB already issued an ASU related t land easements and recently finalized new transitin expedients and a set f technical crrectins t clarify certain aspects f the new mdel. Anther expsure draft is expected shrtly t address treatment f csts paid by lessees. This paper fcuses n a lessr s presentatin and disclsure requirements. Lessrs will be required t prvide mre infrmatin abut the nature f their leases and subleases. In additin, Accunting Standards Cdificatin (ASC) 842 expands lessr disclsure bligatins t include in interim-perid financial statements. These new qualitative and quantitative disclsures shuld be cnsidered upfrnt in the planning prcess. Entities can then develp a plan t fill any infrmatin gaps and implement new prcesses, plicies, cntrls and systems t capture pertinent lease data and cmply with these requirements. Mst ntably, the new rules require rllfrward infrmatin that current systems may nt be able t handle. D nt underestimate the time, effrt and cst t implement these new rules. Effective Dates Leases ASC 842 Public Entities 1 Annual and interim reprting perids beginning after December 15, 2018 All Others Annual reprting perids beginning after December 15, 2019 SAB 74 Disclsures The U.S. Securities and Exchange Cmmissin s (SEC) Staff Accunting Bulletin (SAB) N. 74, Disclsure Of The Impact That Recently Issued Accunting Standards Will Have On The Financial Statements Of The Registrant When Adpted In A Future Perid, impses financial statement disclsure requirements in advance f a cmpany s adptin f a new accunting standard. In several speeches, SEC fficials have made it clear they are lking fr increasing levels f detail frm SAB 74 disclsures as the effective date appraches. In multiple public speeches, senir SEC fficials nted they are lking fr disclsures beynd the plain language f SAB 74. Statements that the new standard s effect is immaterial shuld reflect cnsideratin f the new standard s full scpe, which cvers recgnitin, measurement, presentatin and disclsure fr lease transactins. The SEC staff expects t see the fllwing in the upcming SAB 74 disclsures: 1 A public entity is defined as any ne f these: A public business entity A nt-fr-prfit entity that has issued r is a cnduit bnd bligr fr securities traded, listed r quted n an exchange r ver-the-cunter market An emplyee benefit plan that files r furnishes financial statements t the SEC
Lessr Presentatin & Disclsure Requirements A cmparisn f current accunting plicies t the expected new accunting plicies The status f implementatin. The status f the prcess shuld be disclsed, including significant implementatin matters nt yet addressed r if the prcess is lagging Cnsideratin f the effect f new ftnte disclsure requirements in additin t the effect n the balance sheet and incme statement. A new accunting standard may nt be expected t materially affect the primary financial statements; hwever, it may require new significant disclsures that require significant judgments Disclsure f the quantitative effect f new accunting standards if it can be reasnably estimated Disclsure that the expected financial statement effect f new accunting standards cannt be reasnably estimated Qualitative disclsures. When the expected financial statement effect is nt yet knwn by a registrant, a qualitative descriptin f the effect f the new accunting standard n the registrant s accunting plicies shuld be disclsed The SEC recgnizes that SAB 74 disclsures are preliminary and subsequent changes in disclsed estimates will nt be assumed t reflect a cntrl deficiency relating t prir disclsures. A cmpany s disclsures shuld evlve ver time and be cnsistent with infrmatin prvided t its audit cmmittee and investrs. As management cmpletes prtins f its implementatin plan and develps an assessment f the anticipated effect, effective internal cntrls shuld be designed and implemented t timely identify disclsure cntent and ensure that apprpriately infrmative disclsure is made. The SEC annunced it will pay clse attentin t bth the accunting plicy ftnte addressing the effect f adptin f the new generally accepted accunting principles (GAAP) and a cmpany s quarterly disclsures f any material changes t internal cntrls ver financial reprting, given the magnitude f the implementatin prcess. SEC fficials emphasized that audit cmmittees shuld be discussing the utside auditr s views abut management s implementatin effrts. Wesley Bricker, SEC chief accuntant, pintedly bserved in his American Institute f CPAs keynte address: Particularly fr cmpanies where implementatin is lagging, preparers, their audit cmmittees and auditrs shuld discuss the reasns why [implementatin is lagging] and prvide infrmative disclsures t investrs abut the status s that investrs can assess the implicatins f the infrmatin. Successful implementatin requires cmpanies t allcate sufficient resurces and develp r engage apprpriate financial reprting cmpetencies. SAB 74 requirements nly apply t public cmpanies but can prvide valuable insights t private cmpanies n the size, scpe and challenges in implementing this standard. Presentatin The new lease standard has specific financial statement presentatin requirements fr leasing activity. Lessrs are required t classify leases as sales-type, direct financing r perating leases. Presentatin has nt significantly changed frm current guidance. Balance Sheet Sales-Type & Direct Financing Leases In a sales-type r direct financing lease, the lessr derecgnizes the leased asset and recgnizes a lease investment n its balance sheet. A lessr s aggregate net investment shuld be presented separate frm ther assets n the lessr s balance sheet. Lease assets shuld be classified as current r nncurrent. 2
Lessr Presentatin & Disclsure Requirements Operating Lease A lessr shuld classify assets subject t perating leases as prperty, plant and equipment, e.g., within buildings, r as a separate line item n the balance sheet, e.g., assets subject t perating leases. As with ther fixed assets, prperty subject t perating leases may be presented net f accumulated depreciatin n the balance sheet, but the accumulated depreciatin shuld be shwn n the face f the balance sheet r disclsed in the ntes t the financial statements. Fr perating leases with rents that change ver time, the requirement t recgnize rental incme n a straight-line basis may generate a rent receivable r deferred rent revenue n the lessr s balance sheet. A lessr als may need t recgnize a prepaid asset n the balance sheet arising frm initial direct csts that the lessr will recgnize as an expense ver the lease term. Lessrs shuld present a rent receivable, deferred rent r prepaid initial direct csts with items f similar maturities n a classified balance sheet, e.g., with ther prepaid items assciated with lng-term cntracts. Incme Statement Sales-Type & Direct Financing Leases A lessr in a sales-type lease will recgnize a selling prfit r lss as well as the initial direct csts at lease cmmencement. The prfit r lss recgnized shuld be presented in a manner that best reflects the business mdel assciated with the leased asset. Fr example, a manufacturer that leases assets as a means f realizing value frm gds it wuld therwise sell may present the revenue and cst f gds sld n a grss basis. Alternatively, if a lessr leases assets t generate revenue by prviding financing, it may be apprpriate t present the net prfit r lss in a single line item. A lessr in a direct financing lease shuld defer the selling prfit and initial direct csts, bth f which are included in the net investment f the lease. Amrtizatin f the initial direct csts shuld be recrded as a reductin f interest incme rather than as an expense. Operating Lease A lessr shuld present rental incme frm an perating lease net f the amrtizatin f rent receivables, deferred rent r prepaid initial direct csts. A lessr shuld cntinue t measure the underlying asset subject t an perating lease in accrdance with ther GAAP. Depreciatin f the underlying asset shuld be presented grss and shuld nt ffset rental incme. Cash Flw Statement A lessr is required t classify cash receipts frm all lease payments, regardless f lease classificatin, as perating activities. Disclsures The lease standard includes a disclsure bjective intended t prvide users f financial statements with infrmatin adequate t assess the amunt, timing and uncertainty f cash flws arising frm leases. Bth quantitative and qualitative disclsure requirements will increase fr lessrs and lessees. These new disclsures, blded belw, may require new prcesses and internal cntrls. Further, the disclsures are subject t audit and, fr public entities, will be in scpe fr management s reprt n internal cntrls. Lessrs must cnsider the level f detail necessary t satisfy the disclsure bjective and hw much emphasis t place n each requirement. Aggregatin shuld be at a level s useful infrmatin is nt bscured by including a large amunt f insignificant detail r by aggregating items that have different characteristics. Fr cmpanies with extensive significant leasing activities, mre cmprehensive disclsures will be expected. While ASC 842 requires nly certain lessr disclsures t be made in all interim financial statements, Regulatin S-X requires SEC registrants t prvide bth the applicable lessr and lessee annual and interim disclsures in each interim perid included in the entity s quarterly reprts n Frm 10-Q in the year f adptin f a new accunting standard. 3
Lessr Presentatin & Disclsure Requirements A lessr shuld disclse infrmatin abut all f the fllwing: Qualitative Disclsures Nature f leases A general descriptin f thse leases The basis and terms and cnditins n which variable lease payments are determined The existence and terms and cnditins f ptins t extend r terminate the lease The existence and terms and cnditins f ptins fr a lessee t purchase the underlying asset Significant judgments The determinatin f whether a cntract cntains a lease The allcatin f the cnsideratin in a cntract between lease and nnlease cmpnents The determinatin f the amunt the lessr expects t derive frm the underlying asset fllwing the end f the lease term Lease transactins between related parties. Related-party lease guidance has been updated; disclsure applies nly with legally enfrceable terms and cnditins Risk management infrmatin n the residual value f its leased assets, including: Risk management strategy fr residual assets Carrying amunt f residual assets cvered by residual value guarantees (excluding guarantees cnsidered t be lease payments fr the lessr) Any ther means by which the lessr reduces its residual asset risk, e.g., buyback agreements r variable lease payments fr use in excess f specified limits Quantitative Disclsures Lease incme recgnized in each annual and interim reprting perid, in a tabular frmat, including: Fr sales-type leases and direct financing leases, prfit r lss recgnized at the cmmencement date (can be grss r net basis) and the interest incme either in aggregate r separated by cmpnents f the net investment in the lease Fr perating leases, lease incme relating t lease payments Lease incme relating t variable lease payments nt included in the measurement f the lease receivable. (Previus guidance nly required disclsure f the ttal f cntingent rentals included in incme in each perid presented) The cmpnents f its aggregate net investment in sales-type and direct financing leases, e.g., the carrying amunt f its lease receivables, its unguaranteed residual assets and any deferred selling prfit n direct financing leases In additin t the items nted abve, further disclsures are required fr lessrs depending n the type f lease: Sales-type and direct financing leases Explain significant changes in the balance f its unguaranteed residual assets and deferred selling prfit n direct financing leases 4
Lessr Presentatin & Disclsure Requirements Maturity analysis f its lease receivables, shwing the undiscunted cash flws t be received n an annual basis fr a minimum f each f the first five years and a ttal f the amunts fr the remaining years. A lessr shall disclse a recnciliatin f the undiscunted cash flws t the lease receivables recgnized in the statement f financial psitin (r disclsed separately in the ntes) Operating leases Maturity analysis f lease payments, shwing the undiscunted cash flws t be received n an annual basis fr a minimum f each f the first five years and a ttal f the amunts fr the remaining years. This maturity analysis shuld nt include sales-type leases and direct financing leases they must be brken ut separately Disclsures required by Tpic 360 n prperty, plant and equipment separately fr underlying assets under perating leases frm wned assets. FASB cncluded leased assets ften are subject t different risks than wned assets. The lessr shuld disaggregate by significant class f underlying asset subject t lease because the risk related t ne class f underlying asset may be very different frm anther, e.g., a building versus an airplane BKD has prepared a library f BKD Thughtware n lease issues. Visit ur Ht Tpics page t learn mre. If yu have questins abut the new rules, cntact yur BKD advisr. Cntributr Anne Cughlan Directr 317.383.4000 acughlan@bkd.cm 5
Lessr Presentatin & Disclsure Requirements Appendix A SEC SAB 74 Examples United Rentals, Inc. 1Q 2018 In March 2016, the Financial Accunting Standards Bard ( FASB ) issued guidance ("Tpic 842") t increase transparency and cmparability amng rganizatins by requiring i) recgnitin f lease assets and lease liabilities n the balance sheet and ii) disclsure f key infrmatin abut leasing arrangements. Sme changes t the lessr accunting guidance were made t align bth f the fllwing: i) the lessr accunting guidance with certain changes made t the lessee accunting guidance and ii) key aspects f the lessr accunting mdel with revenue recgnitin guidance. Tpic 842 will be effective fr fiscal years and interim perids beginning after December 15, 2018, and early adptin is permitted. A mdified retrspective apprach is required fr adptin fr all leases that exist at r cmmence after the date f initial applicatin with an ptin t use certain practical expedients. We expect t adpt this guidance when effective. As discussed in nte 2 t ur cndensed cnslidated financial statements, mst f ur equipment rental revenues, which accunted fr 84 percent f ttal revenues fr the three mnths ended March 31, 2018, will be accunted fr under the current lease accunting standard ("Tpic 840") until the adptin f Tpic 842. While ur review f the equipment rental revenue accunting under Tpic 842 is nging, we have tentatively cncluded that n significant changes are expected t the accunting fr mst f ur equipment rental revenues upn adptin f Tpic 842. Under Tpic 842, ur perating leases, which include bth real estate and nn-rental equipment, will result in lease assets and lease liabilities being recgnized n the balance sheet. We lease a significant prtin f ur branch lcatins, and als lease ther premises used fr purpses such as district and reginal ffices and service centers. We expect that the quantificatin f the amunt f the lease assets and lease liabilities that we will recgnize n ur balance sheet will take a significant amunt f time given the size f ur lease prtfli. While ur review f the lessee accunting requirements f Tpic 842 is nging, we believe that the impact n ur balance sheet, while nt currently estimable, will be significant. TAL Internatinal Grup, Inc. 1Q 2018 In February 2016, the Financial Accunting Standards Bard ("FASB") issued Accunting Standards Update N. 2016-02 ("ASU N. 2016-02"), Leases (Tpic 842) that replaces existing lease guidance. The accunting applied by lessrs under Tpic 842 is largely unchanged frm previus GAAP. Sme changes t the lessr accunting guidance were made t align bth f the fllwing: i) the lessr accunting guidance with certain changes made t the lessee accunting guidance and ii) key aspects f the lessr accunting mdel with revenue recgnitin guidance. These changes will becme effective fr the Cmpany fr perids beginning after December 15, 2018. The Cmpany is currently evaluating the effect the guidance will have n the Cnslidated Financial Statements, but des nt expect any material impact t its financial statements. 6
Lessr Presentatin & Disclsure Requirements CIT Grup Inc. 1Q 2018 7