Leases ASU 2016-02 September 20, 2017
Meet the Speakers Tonisha Spratte, CPA Senior Accountant Cherry Bekaert tspratte@cbh.com Matthew Mars Senior Accountant Cherry Bekaert mmars@cbh.com
Agenda What is a Lease? What are the Lease Classifications? How do we initially Recognize a Lease? Subsequent Measurement Disclosures 3
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
Its all about Good Intentions: 1. Improve Financial Reporting about Leasing Transactions 2. Comparability to IFRS 5
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
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.
Control Substantially all of the economic benefits Right to direct the use
Considerations Substantive Substitution Rights Protective Rights 9
Not in Scope Intangible assets Nonregenerative resources Biological assets Inventory
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
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
Lease Term Noncancellable period Option to terminate Option to extend
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
Financing Lease - New 1. 1. Transfer of ownership 2. 2. Option to purchase is reasonably certain 3. 3. Lease term is a major part of the economic life 4. 4. Asset is specialized in nature 5. 5. PV of lease payments is substantially all of the FV
Operating Lease Any lease other than a finance lease
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
Recognition Lease Liability Right-of-use asset
Lease Liability PV of lease payments Fixed payments Exercise price of options Penalties Residual value guarantees Certain variable lease payments Optional periods Purchase price
Do Not Include Certain variable lease payments Guarantee of the lessor s debt Nonlease components
Discount Rate Rate implicit in the lease Incremental borrowing rate Risk Free Rate
Asset Recognition Lease liability Prepayments Lease incentives Initial direct costs
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.
Finance Lease
Income Statement Amortization of ROU Asset Straight line Shorter of economic life or lease term Exception ownership transfer or option to purchase
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
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
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 Operating Lease
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
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
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
Summary
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
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
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
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
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
When do I have to do anything? Public Entities FYB > 12/15/18 All other Entities FYB > 12/15/19 Early adoption is permitted
Questions & Comments? Tonisha Spratte Senior Assurance Services tspratte@cbh.com Matthew Mars Senior Assurance Services mmars@cbh.com