NEW LEASE ACCOUNTING STANDARD Accounting Standards Update (ASU) 2016-02, Leases & GASB 87, Leases LEASES Leases: Why a New Leases Standard? 1
IMPLEMENTATION TIMELINE January 2016 IASB issued IFRS 16, Leases February 25, 2016 FASB issued Accounting Standards Update (ASU) 2016-02, Leases (nearly 500 pages) December 15, 2018 Effective date of ASU 2016-02 for public companies January 1, 2019 Official effective date of the IFRS 16 December 15, 2019 Effective date of ASU 2016-02 for all other entities (Fiscal years beginning after 12-15- 19) WHY CHANGE?» FASB & IASB study & statistics» IASB over $3 trillion of leasing commitments for global listed entities» Over 85% are not presented on the balance sheet airlines, retailers, travel & transportation industry largest» FASB - $1 trillion of off balance sheet leases for SEC registrants» More faithful representation of a lessee s rights and obligations 2
CURRENTLY» Capital lease recorded on the balance sheet as an asset and liability» Operating lease not recorded on the balance sheet NEW LEASE ACCOUNTING STANDARD» FASB accounting standards update (ASU) 2016-02, Leases» Present value of the lease payments on all leases» Capitalized on balance sheet asset and liability» Exception --- short term leases (12 months or less in term) 3
NEW STANDARD Balance Sheet Income Statement Cash Flows FINANCE LEASE Recognize a right-of-use asset and a liability, initially measured at PV of the lease payments Recognize interest expense on the lease liability & amortization of the right-of-use asset Classify repayments of the principal portion of the lease liability within financing activities & payments of interest with variable lease payments within operating activities OPERATING LEASE Recognize a right-of-use asset and a liability, initially measured at PV of the lease payments Recognize a single lease cost, calculated so that the cost of the lease is allocated over the lease term on SL Classify all payments within operating activities CONSIDERATIONS» Any contracts entered into or modified after the effective date of the new standard should be reassessed using the new terms.» Lease is present if:» Contract includes an identified asset and» Customer has the right to control the use of the asset 4
NEW LEASE ACCOUNTING STANDARD» Key components» Lease assets and lease liabilities recognized for all leases greater 12 months» Income statement expense recognition substantially same» Attention shift --- is the arrangement a lease?? NEW LEASE ACCOUNTING STANDARD» At lease commencement date, lessee will measure:» Lease liability at PV of lease payments» Right of use asset 5
NEW LEASE ACCOUNTING STANDARD» US GAAP determination is based on the substance of the contract terms and not whether the contract includes the word lease.» Lease requires both:» Identified asset» Right to control this identified asset for a period of time» Right to economic benefits from use and right to direct the use of the asset NEW LEASE ACCOUNTING STANDARD» Right to control» Contract terms must provide decision making authority» Economic benefits from use of the asset 6
OTHER CONSIDERATIONS» Variable lease payments payments that depend on an index or a rate (CPI or a market interest rate) initially be measured using the index / rate at commencement» Renewal options include payments to be made only if reasonably certain to exercise the option» Segregating lease components must separate non-lease components INCOME STATEMENT» Operating leases: straight line: lease expense (calculated so cost of the lease is allocated over the lease term straight line basis)» Financing leases (capital): amortization and interest expense recorded separately 7
EBITDA» Capital leases interest and amortization expense increase EBITDA compared with operating leases (lease expense decreases EBITDA)» New standard all leases will be on the balance sheet, classification as financing (capital) as interest and amortization will be added back DEBT COVENANTS» Basis for conclusions (paragraph 14):» FASB indicate a significant portion of debt covenants were based on US GAAP at the time of the loan agreement (aka Frozen GAAP or Semi-Frozen GAAP ) such that changes in financial ratios solely from a GAAP accounting change either:» Will not constitute a default or» Will require both parties to negotiate in good faith when a default occurs as a result of new GAAP» Borrowers might want to negotiate for frozen GAAP or» Exclude operating lease liabilities from the definition of liabilities for borrowing agreements 8
DEBT COVENANTS» FASB/IASB outreach with banks:» Concluded banks unlikely to dissolve a good customer relationship because of a default solely from a GAAP change» FASB categories operating lease liabilities as operating liabilities rather than debt» Will these affect financial ratios often used in debt covenants?» Extended effective date re-negotiate terms DEBT COVENANTS» Leverage ratios violated upon adoption of new standard?» Liabilities will be increased» Fixed asset ratios will be higher» Risk based assets will increase 9
GASB STATEMENT 87» Contract must convey control of the right to use a nonfinancial asset for a period of time in an exchange or exchange-like transaction» Two Exceptions:» Short term (12 months or less)» Lease that transfer ownership of a leased asset at the end of the term» Contracts that transfer ownership and don t contain a termination clause, lessees should record the contract as a financed purchase of an asset GASB STATEMENT 87» Lessee recognize a lease liability and a lease asset at the start of the lease term» Lease liabilities will be considered long-term debt» Lease payments will be capital financing outflows in the cash flow statement» Activity statement lessees will no longer report rent expense for today s operating-type leases, but will report interest expense on the liability and amortization expense related to the asset 10
CONSIDERATIONS» Preparers and users need to consider impacts» Review current contracts and current lease arrangements» Take inventory of all leases» Some may be embedded in service arrangements or provided alongside other goods and services» Once identified, each lease should be evaluated to determine its classification CONSIDERATIONS» Begin discussions with creditors/lenders» Review existing contractual and debt arrangements so these can be adjusted ASAP» Work with lenders through the normal course of business to amend debt arrangements if necessary to avoid losing access to financing 11
CONSIDERATIONS» Take inventory of all leases (can you find the contracts and documents?)» Related party leases (are these formalized)?» Embedded leases» Taxes» Lease renewals» Discount rate» Variable payments TRANSITION & PRACTICAL EXPEDIENTS Lessees and lessors are permitted to make an election to apply factors that allow them not to reassess: 1. Whether any expired or existing contracts are or contain a lease 2. Lease classification for any expired or existing leases 3. Initial direct costs for any expired or existing leases 12
ASU 2016-14, NOT-FOR-PROFIT ENTITIES: PRESENTATION OF FINANCIAL STATEMENTS OF NOT-FOR-PROFIT-ENTITIES» Exposure Draft April 2015» Standard Issued: August 18, 2016» 264 pages!» Effective for fiscal years beginning after 12/15/2017» OR calendar year ending December 31, 2018» Early adoption permitted SPECIFIC CHANGES: NET ASSET CLASSES» Currently:» Unrestricted» Temporarily Restricted» Permanently Restricted» New:» Without Donor Restrictions» With Donor Restrictions 16
NEW DISCLOSURES» Qualitative information» How a NFP manages its liquid resources available to meet cash needs within 1 year of the balance sheet date» Quantitative information» Availability of financial assets to meet cash needs within 1 year of the balance sheet date» All NFPs required to present the liquidity and availability disclosures REVENUE RECOGNITION AND OTHER IMPORTANT UPDATES 17
EFFECTIVE DATES» Public Entities:» Periods Beginning On or After December 15, 2017» Nonpublic Entities:» Periods Beginning On or After December 15, 2018 & interim reporting periods beginning after December 15, 2019 REVENUE RECOGNITION PROCESS Five Step Approach: 1. Identify the Contracts with your Customers 2. Identify the Performance Obligations in the Contract 3. Determine the Transaction Price 4. Allocate Price to the Performance Obligations 5. Recognize Revenue when a Performance Obligation is Satisfied 18
IDENTIFY THE CONTRACT» Specific criteria must be met» Commercial substance» Promised goods and services must be identified and approved» Payment terms identified IDENTIFY PERFORMANCE OBLIGATIONS» Applicable when more than one good or service transferred» Additional good or service must be distinct» Could be sold separately or customer could benefit from the good or service on its own» Not distinct if bundled 19
DETERMINE TRANSACTION PRICE» What do you expect to receive?» Variable consideration - discounts, rebates, refunds, and royalties» Noncash payments (services) measured at fair value» Any amounts owed to customer reduces the revenue estimate» Time value of money should be included based on expected timing of payment ALLOCATE TRANSACTION PRICE» Separate pricing for each performance obligation» Performance Obligations were identified in Step 2 20
RECOGNIZE REVENUE» The satisfaction of each performance obligation» When customer obtains control of the good or service» If satisfied over time, use a progress method to recognize revenue REVENUE RECOGNITION UPDATES» November 2017-14» Guidance with respects to Vaccine Sales and Stockpiles» September 2017-13» Certain public entities may be able to use nonpublic effective date» Remove paragraphs containing SEC statements» December 2016-20 Added provisions for Losses on Contracts Excludes all contracts under Topic 944 Financial Services - Insurance» Clarification of disclosure of remaining performance obligations & prior performance satisfied 21
REVENUE RECOGNITION UPDATES» May 2016-12 Clarify the objective of collectability Exclusion option for collection of taxes in the transaction price Measurement date for noncash consideration is contract inception Aggregate reporting of contract modifications prior to the earliest period» Clarify treatment for completed contract revenue» April 2016-10» Guidance on determining performance obligations» Revenue recognition as it pertains to licensing» March 2016-08» General technical improvements for simplicity and operability ADOPTION METHODS» Full Retrospective Adoption» Cumulative effect adjustment to equity on earliest year presented» Generally applies to existing contracts, with many exceptions» Modified Retrospective Adoption» No restatement of prior years» Additional disclosures of each financial statement line item affected in the current period» Both methods are a change in accounting principle 22
» Read ASU 2014-09 and updates through ASU 2017-14» Determine financial statement impact» Single year versus comparative in the year adopted» Adjust processes now to capture information for the implementation year» Develop and implement any necessary internal controls» Determine if revenue policies needs to be updated IMPLEMENTATION HELP» FASB has released several implementation guides» Revenue Recognition» Leases» Credit Losses» Not-for Profit Financial Reporting» Tax Cuts and Jobs Act» Hedge Accounting» Other Standards 23
GOING CONCERN SAS 132, AUDITOR S CONSIDERATION OF AN ENTITY S ABILITY TO CONTINUE AS A GOING CONCERN» Effective for periods ending on or after 12/15/2017» Major changes» Evaluation period» Auditor determinations» Increases client discussions 24
AUDITOR DETERMINATIONS REGARDING GOING CONCERN» Stage 1 Is going concern basis appropriate?» Stage 2 Is there substantial doubt about continuance as a going concern for a reasonable period of time? POSSIBLE INDICATORS OF SUBSTANTIAL DOUBT» Negative Financial Trends» Recurring operating losses» Working capital deficiencies» Negative cash flows from operating activities 25
POSSIBLE INDICATORS OF SUBSTANTIAL DOUBT» Other Financial Difficulties» Default on loans» Dividends in arrears» Denial of usual trade credit from suppliers» Debt restructures to avoid default» Noncompliance with capital requirements» Need to dispose of assets or find new financing sources POSSIBLE INDICATORS OF SUBSTANTIAL DOUBT» Internal Matters» Work stoppages / labor difficulties» Substantial dependence on a single project / client» Uneconomic long-term commitments» A need to significantly revise operations 26
POSSIBLE INDICATORS OF SUBSTANTIAL DOUBT» External Matters» Legal proceedings that might jeopardize operations» Loss of a key franchise, patent, or license» Loss of a principle customer or supplier» Natural disaster was there enough insurance? MANAGEMENT S PRELIMINARY EVALUATION» Management must complete an evaluation» Lack of completion may indicate a deficiency» Auditor is REQUIRED to review management s analysis» Reasonable look forward period» Knowledge of anything beyond? 27
WHAT IF ISSUES ARE IDENTIFIED?» Auditor must evaluate management s plans» Read minutes and agreements» Obtain interim financials» Analyze forecasts» Obtain third-party support» Must be in writing» Evaluation of ability to pay AUDIT REPORT IMPACTS» Disclosure of circumstances in the footnotes» Lack of could result in adverse or qualified opinion» Optional Close Call Emphasis paragraph in opinion letter» When the correction plan is adequate» Going concern basis is inappropriate = adverse opinion 28
HEALTH AND WELFARE PLAN FORM 5500 FILING REQUIREMENTS» Greater than 100 employee participants» Unfunded, fully insured, or combination» Multiple benefits could equal multiple filings if not wrapped into a single plan» Multiple employer plan required to file the M-1» Voluntary Employees Beneficiary Association (VEBA) Trust» Audit» Related 990 for the trust» Patient-Centered Outcomes Research Fee (PCORI) - Form 720 29
FILING DEADLINES» Form 5500» 7 months after plan year end, automatic 2.5 month extension» Form 990» 4.5 months after year end, automatic 6 month extension» Form 720» 2 nd Quarter Filing Due by July 31» M-1 Filing» March 1 based on the previous calendar year information PENALTIES AND CORRECTION METHODS» Delinquent 5500» Current penalty - $2,097 per day late (annual inflation adjustment)» Delinquent Filer Voluntary Compliance Program (DFVCP)» Penalty capped at $2,000 for one plan, one year» Penalty capped at $4,000 for one plan, multiple years 30
QUESTIONS? Kevin Peters, CPA kevin@bcscpa.com (423) 282-4511 Tara Fenner, CPA, CMFO tfenner@bcscpa.com (423) 282-4511 31