Lease Accounting Exposure Draft ACI-NA Webinar May 10, 2016
Call Participants ACI-NA: Liying Gu Moderator: Max Underwood, DFW Intl Airport Accounting Firm: BKD, LLC Rick Wittgren Deborah Beams Airports: Ann Davis, Tampa International Airport Kathleen Sharman, Greater Orlando Aviation Authority Sylvia Ambrogio, Sacramento County Airport System 2
Agenda Exposure Draft background & summary - BKD Perspective from 3 airports Summary of ACI-NA written comments Comment template for ACI-NA member airports Questions & answers 3
LEASES GASB EXPOSURE DRAFT
PROJECT OVERVIEW Reevaluate long-standing guidance Issuance of Concepts Statements defining assets and liabilities FASB and IASB projects Began project in summer 2013 Preliminary Views issued November 2014 Exposure Draft issued January 2016 Comment period ends May 31, 2016 Final standard expected by end of 2016 Proposed effective dates for periods beginning after December 15, 2018
FOUNDATIONAL PRINCIPLE Leases are financings Exchange of the right to use an asset for promise to make payments Based on legally enforceable rights and obligations Generally should be treated like other financings
BASIC MODELS Lessees Financed acquisition of the right to use an asset Intangible asset and lease liability Amortization expense of asset, interest expense on liability Lessors Financed giving up of the right to use an asset Lease receivable and deferred inflow of resources Interest revenue on receivable, lease revenue from deferred inflow of resources Asset retained for cost-benefit reasons
LESSOR MODELS Why change what we ve got? GASB is independent organization with different stakeholders and concepts Comprehensive project needs to consider both sides Consistency with concepts definitions and foundational principle Symmetry between lessee and lessor models Rewrite for clarity
LEASE TERM Period of time for which the lease will be in effect Determines what payments will be included in lease liability or receivable Renewal or cancellation options If lessee alone has option to renew or cancel, consider likelihood of that occurring Fiscal funding clauses (lessees) are treated like any other cancellation option If lessee and lessor each have the option to cancel, lease term does not extend beyond any noncancellable or notice period (regardless of likelihood)
SHORT-TERM EXCEPTIONS Maximum possible term of one year or less Includes all renewal options If lessee and lessor each have cancellation option, maximum possible term is the notice period Financing element not as significant Cost relief Recognize payments based on terms of lease as they come
LESSOR MODEL EXCEPTIONS Transfer of ownership Investment property Regulated leases Regulatory limits on costs that can be recovered through the lease Intended to exempt airport-airline agreements and similar Nature of these leases is different from a normal financing
LESSOR ACCOUNTING Lessor should recognize a lease receivable and deferred inflow of resources Lease receivable is measured at present value of lease payments expected to be received Lessor would recognize interest revenue on lease receivable and revenue (inflow of resources) over term of lease Lessor would NOT derecognize asset that is leased
AIRLINE AGREEMENTS Sometimes called use and lease agreements, but Different from typical leases GASB intended to provide exemption for airline use agreements Wording may not cover all agreements that were intended to be exempted
OTHER LEASES Concessions, rental car facilities, FBO Would be subject to regular lease model Consideration of contract terms (cancellation clauses)
IMPACT FOR AIRPORTS May be a large volume of leases to analyze and track A portion of lease revenue currently presented as operating could be recognized as interest income (nonoperating), which could negatively impact rate covenant calculations Recognition of a potentially large receivable and deferred inflow of resources
EXEMPTION PROVIDED GASB attempted to provide exemption for airline use agreements, but wording may not cover all agreements that were intended to be exempted For leases for which external laws, regulations, or legal rulings (a) establish the costs that may be recovered through lease payments and (b) significantly limit the ability of the lessor to set rates in excess of those costs, the lessor should not apply the general recognition and measurement provisions of this Statement. For example, the U.S. Department of Transportation regulates aviation leases between airports and airlines. For such leases, the lessor should recognize an inflow of resources (for example, revenue) based on the payment provision of the contract and provide the disclosures in paragraph 51. 36
POTENTIAL CONCERNS FOR AIRPORTS FASB model does not require reciprocal accounting for lessors, while GASB proposed guidance does Lessor balance sheets/statements of net position would include both the leased asset and the lease receivable This is further impacted by revenue sharing components of some airline use agreements
POTENTIAL CONCERNS FOR AIRPORTS (CONT.) Airports typically have a large volume of leases A portion of lease revenue that is currently presented as operating could be recognized as interest income (nonoperating), which could negatively impact rate covenant calculations When preparing Comment Letters to GASB, be sure focus on technical arguments rather than the cost/burden of implementation
OTHER TOPICS COVERED IN EXPOSURE DRAFT Contracts with multiple components Required to separate lease and service components Account for each component as if it was a separate contract Process for allocating consideration Lease terminations and modifications Subleases Sale-leaseback transactions Lease-leaseback transactions
THANK YOU! FOR MORE INFORMATION Rick Wittgren, CPA Partner 317.383.5470 rwittgren@bkd.com
Perspective from Airports 23
Tampa International Airport (TIA) TIA Background Airline Rate Structure Compensatory terminal, residual airfield, net revenue sharing Approximately130 150 lease agreements Airline Rates tied to cost recovery Concession leases include space rentals, minimums and percent rent Minimums reset each year based on prior year s revenue Costly to implement and on-going costs No benefit to stakeholders or users of financial statements Does not accurately reflect the underlying business and economics of the airport 24
Greater Orlando Airport Authority About Orlando International Airport Rates by Resolution Airfield Residual Terminal Compensatory Revenue Sharing Agreement Approximately 175 agreements Concession leases include space rentals, minimums and percentage rent
Greater Orlando Airport Authority, continued Costly to implement and on-going costs Contracts with multiple components would be required to separate lease and service components The cost of borrowing changes every year, interest rates will need to be re-evaluated each year No benefit to stakeholders or other users of the financial statements Lessor would have both a lease asset and a lease receivable on the books Potential overstatement of lease receivables due to revenue sharing agreement
Sacramento County Airport System Understanding the Benefits of Exposure Draft? Provide financial statement users with better information to assess the obligations and costs related to leasing activities and the impact of those activities on the financial statements Dynamic industry with frequent change in economic characteristics of lessee (measure of true value beyond immediate future may be unreliable) Estimating lease rents contingent upon anticipated operations of multiple parties will hinder rather than enhance user s ability to analyze the statement Future valuation of lease is indeterminable considering year-end settlement, calculations on PY operations/revenue (Landing, Concession), CPI +/-, other business terms (i.e. Out clauses, rent credits) Misrepresentation of assets as R&C include amortized capital/debt service of fixed assets also recorded Rentals and Operating Leases are disclosed in Notes to Financial Statements Enhance comparability between governments by using a single classification for leases Theory of If you ve seen one airport, you ve seen one airport - Residual vs. Compensatory; Revenue sharing (or not?) 27
Sacramento County Airport System, continued Rates by Ordinance - Excluded? PV indeterminable with no lease term Complexity of Business Terms (based on type/use of asset) Rents include cost recovery component for service contracts which are not accounted for as lease agreements Valuation of lease is not objectively determinable and interpretation may limit comparable analysis between airports Provide financial statement preparers and auditors with guidance that is more consistent and less complex Approximately 450 leases to be analyzed for the 5 airports in the Sacramento County Airport System including annual estimate of receivables, calculated interest revenue on receivable and reporting corresponding deferred inflow of revenues Limited resources for burdensome analysis Implementation and on-going maintenance would be costly Interpretation of lease terms associated with best guess estimates would add complexity for preparers and auditors Airline rents are calculated annually on cost recovery basis and set with approval of annual operating budget by governing body 28
ACI-NA Written Comments ACI-NA will file comments to GASB by May 31, 2016 Reviewed by Finance Steering Committee June 29 public hearing at SFO Airport Doubletree Hilton Airline Use Agreement exception should be modified to reflect rate setting in the United States Current exemption is not effective Rates vary with costs and non-airline revenue sharing Proposed exemption: For leases in which lease rates are re-established periodically based on the recovery of actual costs or the sharing of other revenues with lessee, the lessor should not apply the general recognition and measurement provisions of this Statement. 29
ACI-NA Written Comments, continued Assets are overstated Underlying assets remain on lessor s books Non-airline lease revenues (concessions, commercial development, FBO, etc.) may be shared with airlines Proposed exemption for leases in which all or a portion of lease proceeds are used to reduce proceeds from another party per provisions of contractual arrangements with such parties GASB should follow lead of FASB and IASB and leave lessor accounting intact PV of future lease proceeds not subject of investor inquiry unlike unrecorded liabilities. Symmetrical lessee/lessor not necessary Example: GASB 70 Nonexchange Financial Guarantees Costs for airports to implement are greater than benefits ACI-NA requests additional year for lessors to implement 30
Template for Airport Written Comments Advantageous for airports to express concerns directly to GASB with written comments Deadline for comments is May 31, 2016 Addressed to Director of Research and Technical Activities, Project No. 3-24E E-mail to director@gasb.org, or Mail to address provided in the GASB Lease Exposure Draft, link is below Template letter is available http://www.acina.org/sites/default/files/airport_template_comment_letter_v05092016.docx Highlighted areas should be modified for your airport Feel free to create, revise or tailor your written comments to your circumstances Comment about lack of financial advisors or stakeholders interest Link to GASB Lease Exposure Draft http://www.gasb.org/jsp/gasb/document_c/gasbdocumentpage?cid=11761678 52776&acceptedDisclaimer=true 31
Questions? 32