here we go again€¦ · internal audit, risk, business & technology consulting here we go...

Internal Audit, Risk, Business & Technology Consulting

HERE WE GO AGAINTHE NEW LEASE STANDARD (ASC TOPIC 842)February 2018

© 2018 Protiviti Inc. An Equal Opportunity Employer M/F/Disability/Veterans. Protiviti is not licensed or registered as a public accounting firm and does not issue opinions on financial statements or offer attestation services. All registered trademarks are the property of their respective owners.

PRESENTERS

2

Edna LopezProtiviti

Managing [email protected]

Scott EvansProtivitiDirector

[email protected]


AGENDA FOR TODAY

Our Approach To A Successful Transition

3

The New Lease Standard

Big Picture

A Closer Look

LEASES – BIG PICTURE


THE NEW LEASE STANDARD

On February 25, 2016, the Financial Accounting Standards Board (FASB) issued its new lease accounting guidance in Accounting Standards Update (ASU) No. 2016-02, Leases (Topic 842).

The new standard will require lessees to recognize a lease liability and a right-of-use asset for all leases (except for short-term leases; i.e., duration of less than one year) as of the date on which the lessor makes the underlying asset available to the lessee (the commencement date):

Lease liability is the lessee’s obligation to make lease payments arising from a lease, measured on a discounted basis.

A right-of-use asset is an asset that represents the lessee’s right to use, or control the use of, a specified asset during the lease term.

5

Big Picture – Overview



Public Business Entities: The amendments in ASU 2016-02 are effective for public business entities for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years (i.e., January 1, 2019, for a calendar year entity). Early adoption is allowed.

Non-Public Business Entities: Should apply the amendments for fiscal years beginning after December 15, 2019 (i.e., January 1, 2020, for a calendar year entity), and interim periods within fiscal years beginning after December 15, 2020. Early adoption is allowed.

Effective Date

6



“Modified retrospective” application must be applied. It is required for all leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements.

Transition Method: Transition Guidance:

A company must apply the guidance at the beginning of the earliest period presented in a set of financial statements for substantially all leases outstanding at initial application.For example, 2017 data is needed for adoption in 2019 for calendar-year-end public companies.Note: Practical expedients are provided.

*

7

Proposed Accounting Standards Update (January 5, 2018): The Board decided to allow another transition method in addition to the existing requirements to transition to the new lease standard by recognizing a cumulative effect adjustment to the opening balance of retained earnings in the period of adoption consistent with the request by preparers. This additional transition method would change when an entity would be required to initially apply the transition requirements of the new lease standard; it would not change how those requirements apply.

Transition


Whether you are the lessee (using the leased item) or the lessor (owner of the leased item), here is how the accounting will be reflected:

Finance

Lessee

Operating

Sales/Direct Financing

Operating

Lessor

Balance Sheet

Right-of-use asset Lease liability

Right-of-use asset Lease liability

Income Statement

Front-loaded• Amortization expense• Interest expense

Lease expense

Cash Flow Statement

Financing• Principal

Operating• Principal• Variable

payments

Operating

Balance Sheet

Lease receivable Unguaranteed residual Deferred profit

Underlying asset remains

Income Statement

Front-loaded• Interest income on

receivable & residual• Profit (immediate or

deferred)

Lease income

Cash Flow Statement

Operating

Operating

8

THE NEW LEASE STANDARDWhat financial statements will look like …

LEASES – A CLOSER LOOK


THE NEW LEASE STANDARDA Closer Look – Accounting and Financial Reporting Impacts

10

Separate the Components of a Contract

ReassessModified Leases

Determine if a Contract

is or Contains a Lease

Calculate the discounted PV of lease payments

Identify Lease

Attributes

Classify the

Lease

Measure and

Record the Lease

Financial Statement

Disclosures


THE NEW LEASE STANDARD A lease is present if the contract includes…

11

Determine if a contract

is or contains a lease

An identified asset

Is explicitly or implicitly specified

Supplier has no practical ability to substitute or would not economically benefit from substituting the asset

The right to control the asset during the lease term

Decision-making authority over the use of the asset

The ability to obtain substantially all economic benefits from use of the asset


THE NEW LEASE STANDARDLease and Non-Lease Components within a Contract

12

After determining that a contract contains a lease, an entity should identify the separate lease components within a contract. The right to use an asset should be a separate lease component if it meets both of the following criteria:

The new lease guidance also provides lessees with a practical expedient, by class of underlying assets, to not separate nonlease components from the related lease components. If a lessee makes that accounting policy election, it is required to account for the nonlease components together with the related lease component as a single lease component and toprovide certain disclosures.

Practical Expedient:

The lessee can benefit from the right of use either on its own or together with other resources that are readily available to the lessee.

The right of use is neither highly dependent on nor highly interrelated with the other right(s) to use underlying assets in the contract.

http://www.accountingresearchmanager.com/#/r/1DC980ED8496069486257F6400660B7D?checkId=1


THE NEW LEASE STANDARDLease Attributes

13

Lease Payments

• Fixed payments (including optional periods if reasonably certain to exercise)• The exercise price of a purchase option (if the company is reasonably certain to

exercise)• Payments for termination penalties (if the lease term reflects that the lessee will

exercise the option to terminate the lease• Amounts probable of being owed by the lessee under residual value guarantees

Commencement Date • Date that the asset is available for use

Lease Term

• Stated lease term• Renewal lease term if the company is reasonably likely to renew• Early termination - if the company is reasonably likely to terminate before the end of

the stated lease term

Lease Incentives • Lease incentives paid or payable to the lessee

Discount Rate• Implicit rate in the lease• Incremental borrowing rate• Risk-free rate (private entities only)

Initial Direct Costs• Includes only costs incurred as direct result of executing contract• Commissions• Payments made to existing tenant to obtain the lease


THE NEW LEASE STANDARDDoes the lease meet the criteria of a Finance or Operating lease?

14

Capital Lease criteria under ASC 840 vs. Finance Lease criteria under ASC 842

Criteria ASC 840 (Capital Lease) ASC 842 (Finance Lease)

Transfer of Ownership

The lease transfers ownership of the property to the lessee by the end of the lease term.

The lease transfers ownership of the underlying asset to the lessee by the end of the lease term

Purchase Option

The lease contains a bargain purchase option. The lease grants the lessee an option to purchase the underlying asset that the lessee is reasonably certain to exercise.

Lease Term is majority of EconomicLife

The lease term is equal to 75 percent or more of the estimated economic life of the leased property. Except if the beginning of the lease term falls within the last 25 percent of the total estimated economic life.

The lease term is for the major part of the remaining economic life of the underlying asset. Except if the commencement date falls at or near the end of the economic life of the underlying asset.

Present Value of Lease Payments > = Fair Value

The present value at the beginning of the lease term of the minimum lease payments equals or exceeds 90 percent of the excess of the fair value of the leased property to the lessor at lease inception

The present value of the sum of the lease payments (and any guaranteed residual value) equals or exceeds substantially all of the fair value of the underlying asset.

NoAlternative Use

N/A The underlying asset is of such a specialized nature that it is expected to have no alternative use to the lessor at the end of the lease term.

Although ASC 842 eliminates the economic life and fair value bright lines of 75 and 90 percent, it notes in the illustrationsthat using these thresholds is “one reasonable approach” to assess “major part of the remaining economic life” and “substantially all of the fair value”.

*

*

*


THE NEW LEASE STANDARDInitial Lease Liability & Right of Use Asset

Measure the Initial Lease Liability

Initial Lease Liability

Present Value of Unpaid Future Lease

Payments=

Initial Right of

Use Asset=

Initial Lease

Liability+

Initial Direct Costs

Prepaid Lease

Payments

Lease Incentives Received

+ -

15

Measure the Initial Right of Use Asset

+Present Value of amount probable of being owed

under RVG (residual value guaranteed)


THE NEW LEASE STANDARDAccounting Impacts

Operating Lease (lease costs is determined on a straight-line basis)

Lease Cost =# of Periods

in Lease Term

/

Amortization Expense = Initial Right of Use

Asset /# of Periods

in Lease Term

Interest Expense = Initial Lease

Liability * Interest Rate

Finance Lease (Assuming straight-line amortization method)

&

16

The amortization method may be straight-line or another systematic basis that is representative of the pattern in which the lessee expects to consume the remaining economic benefits from its right to use the underlying asset.

Tip :

Sum of Undiscounted

Lease Payments for Lease Term

+ Initial Direct Costs

Incentives Received-( (


THE NEW LEASE STANDARDFinancial Reporting Impacts

17

The new disclosure requirements include a number of new key measurements. Below are some of the more interesting requirements along with the disclosure example provided in the 842 standard:

• While short team leases (<12 months) don’t have to be accounted for under ASC842 there is a disclosure requirement.

• Lease classification disclosures

• Variable lease costs

• Various weighted average disclosures for remaining lease terms and also the discount rate


THE NEW LEASE STANDARDLease Modification

18

Lease Modification is defined by ASC 842 as:“A change to the terms and conditions of a contract that results in a change in the scope of or the consideration for a lease.”

Some examples of lease modification include…

• Granting an additional right of use not included in the original contract

• Extension or reduction to the term of an existing lease

• Full or partial termination of an existing lease

• Change to the consideration in the contract

Lease modifications should be evaluated for proper accounting treatment.


THE NEW LEASE STANDARDA Closer Look - Considerations

Evaluate the Supporting Systems and Data

Companies should consider selecting and implementing

a suitable technology solution to simplify the lease data gathering process, to

perform calculations & JE’s, to determine disclosures,

to interface with disbursements, etc.

Some PossibleTechnology Solutions

Ensure the Enterprise-Wide Lease Inventory is Reliable

Lessees should determine that all leases deployed

across the organization are identified on a timely basis and aggregated to create a

complete and accurate lease inventory and related lease

data elements.

The two most significant challenges will likely be data collection and having proper systems in place.

Nakisa (SAP)

IBM TRIRIGA

ProLease

CoStar

Lucernex

AMTdirectLeaseQuery

Visual Lease

Lease Accelerator

19


THE NEW LEASE STANDARDImpact on Accounting Systems: Lease Accounting System Conceptual Architecture

20

Lease Accounting

System

Accounting Automation• Balance sheet accounting• Lease event management• Lease expense and

amortization• Periodic reclassification• Accounting schedules

Payment Automation• Amortization and payment

schedules• Itemized schedules of

accruals and payments• Approval payment workflows• Payment reconciliation

Reporting and Analytics• Centralized contract repository• Data collection and integration• Analytical Reports

Contracts Management

Assets Management

Standard Accounting

Lease AdministrationAsset Accounting

GL AR AP

Initial Mass Data

Conversion System

Financial Statements

Balance Sheet

Income Statement

Cash Flow Statement

Jan 2019



• Lease determination• Data capturing • Lease agreement and contract

management• Assignment of leader, supplier and fixed

assets

• Classification, amortization, accruals and payments

• Event management and workflows• Equipment tracking• Standard lease-related reporting and

disclosure reporting

Questions to Consider• How big and broad is your lease portfolio?• Are you currently using a lease administration tool?• Is your existing leasing tool compatible with the new standards?• Does your existing leasing tool integrate fully with your ERP system?

21


THE NEW LEASE STANDARDA Closer Look - Considerations

Be mindful of expected changes in the

business

The organization should assess whether changes are expected to take place in the business that will affect the

nature of the lease instruments.

Understand the new disclosures

Company executives will want to understand the financial reporting and

expanded disclosures under the new standard.

Look for embedded leases

If the organization enters into an arrangement that

identifies, and grants to entity right to use PP&E, it

constitutes a lease. Such arrangements may be embedded in service

arrangements.

22


LEASES ARE PREVALENTJust look at what companies are disclosing now

23

Target

ROU Asset = $0.9 - $1.4BnLease Liability = $1.2 - $1.7Bn

FedEx

ROU Asset = $13Bn+Lease Liability = $13Bn+

Citigroup

ROU Asset = $5BnLease Liability = $5Bn

Microsoft

ROU Asset = $5.2Bn - $6.6BnLease Liability = $5.2Bn - $6.6Bn


Lease Accounting Disclosure - Target Corp.

We plan to adopt the standard in the first quarter of 2018. We expect to take advantage of the package of practical expedients permitted within the new standard, which among other things, allows us to carryforward the historical lease classification. In addition, we plan to elect the hindsight practical expedient to determine the reasonably certain lease term.

While lease classification will remain unchanged, hindsight may result in different accounting lease terms for certain leases and affect the timing of depreciation, interest, and rent expense, and the amount of lease assets and liabilities recognized.

While we are continuing to assess all potential impacts of the standard, we expect to record additional net lease liabilities of $1.2-$1.7 billion, with an offsetting increase to leased assets of $0.9-$1.4 billion. The difference between these amounts will be recorded as an adjustment to retained earnings. We do not believe the standard will materially affect our consolidated net earnings. These estimates — based on our current lease portfolio — may change as we continue to evaluate the new standard and as we implement a new lease accounting information system. The estimates could also change due to changes in the lease portfolio, which could include (a) lease volume, (b) lease commencement dates, and (c) renewal option and lease termination expectations. We will update our estimates each quarter as changes occur.

We do not believe the new standard will have a notable impact on our liquidity. The standard will have no impact on our debt-covenant compliance under our current agreements.

We expect to make an accounting policy election that would keep leases with an initial term of 12 months or less off of the balance sheet and would result in recognizing those lease payments in the Consolidated Statements of Operations on a straight-line basis over the lease term.

24



Additionally, we are implementing an enterprise-wide lease management system to assist in the accounting and are evaluating additional changes to our processes and internal controls to ensure we meet the standard’s reporting and disclosure requirements.

Lease Accounting Disclosure - FedEx

On February 25, 2016, the FASB issued a new lease accounting standard which requires lessees to put most leases on their balance sheets but recognize the expenses on their income statements in a manner similar to current practice. The new standard states that a lessee will recognize a lease liability for the obligation to make lease payments and a right-of-use asset for the right to use the underlying asset for the lease term. Expenses related to leases determined to be operating leases will be recognized on a straight-line basis, while those determined to be financing leases will be recognized following a front-loaded expense profile in which interest and amortization are presented separately in the income statement.

Based on our lease portfolio, we currently anticipate recognizing a lease liability and related right-of-use asset on the balance sheet in excess of $13 billion with an immaterial impact on our income statement compared to the current lease accounting model. However, the ultimate impact of the standard will depend on the company’s lease portfolio as of the adoption date.

We are currently in the process of evaluating our existing lease portfolios, including accumulating all of the necessary information required to properly account for the leases under the new standard.

These changes will be effective for our fiscal year beginning June 1, 2019 (fiscal 2020), with a modified retrospective adoption method to the beginning of 2018.

25



Lease Accounting Disclosure - Citigroup

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842), which is intended to increase transparency and comparability of accounting for lease transactions. The ASU will require lessees to recognize leases on the balance sheet as lease assets and lease liabilities and will require both quantitative and qualitative disclosures regarding key information about leasing arrangements. Lessor accounting is largely unchanged.

The guidance is effective beginning January 1, 2019 with an option to early adopt. The Company does not plan to early adopt the ASU. The Company estimates that upon adoption, its Consolidated Balance Sheet will have an approximately $5 billion increase in assets and liabilities. Additionally, the Company estimates an approximately $200 million increase in retained earnings due to the cumulative effect of recognizing previously deferred gains on sale/leaseback transactions.

26



Lease Accounting Disclosure - Microsoft

In February 2016, the FASB issued a new standard related to leases to increase transparency and comparability among organizations by requiring the recognition of right-of-use (“ROU”) assets and lease liabilities on the balance sheet. Most prominent among the changes in the standard is the recognition of ROU assets and lease liabilities by lessees for those leases classified as operating leases under current U.S. GAAP. Under the standard, disclosures are required to meet the objective of enabling users of financial statements to assess the amount, timing, and uncertainty of cash flows arising from leases. We will be required to recognize and measure leases existing at, or entered into after, the beginning of the earliest comparative period presented using a modified retrospective approach, with certain practical expedients available.

The standard will be effective for us beginning July 1, 2019, with early adoption permitted. We elected to early adopt the standard effective July 1, 2017 concurrent with our adoption of the new standard related to revenue recognition. We elected the available practical expedients on adoption. In preparation for adoption of the standard, we have implemented internal controls and key system functionality to enable the preparation of financial information.

The standard will have a material impact on our consolidated balance sheets, but will not have a material impact on our consolidated income statements. The most significant impact will be the recognition of ROU assets and lease liabilities for operating leases, while our accounting for capital leases remains substantially unchanged.

Adoption of the standard will result in the recognition of additional ROU assets and lease liabilities for operating leases of $6.6 billion and $5.2 billion as of June 30, 2017 and 2016, respectively. See Expected Impacts to Reported Results below for the impact of adoption of the standard on our consolidated financial statement.

27


FORM-10KJune 30, 2017



28


FORM-10KJune 30, 2017



29


FORM-10QSeptember 30, 2017



We determine if an arrangement is a lease at inception. Operating leases are included in operating lease right-of-use (“ROU”) assets, other current liabilities, and operating lease liabilities on our consolidated balance sheets. Finance leases are included in property and equipment, other current liabilities, and other long-term liabilities on our consolidated balance sheets.

Operating lease ROU assets and operating lease liabilities are recognized based on the present value of the future minimum lease payments over the lease term at commencement date. As most of our leases do not provide an implicit rate, we use our incremental borrowing rate based on the information available at commencement date in determining the present value of future payments. The operating lease ROU asset also includes any lease payments made and excludes lease incentives and initial direct costs incurred. Our lease terms may include options to extend or terminate the lease when it is reasonably certain that we will exercise that option. Lease expense for minimum lease payments is recognized on a straight-line basis over the lease term.

We have lease agreements with lease and non-lease components, which are generally accounted for separately. For certain equipment leases, such as vehicles, we account for the lease and non-lease components as a single lease component. Additionally, for certain equipment leases, we apply a portfolio approach to effectively account for the operating lease ROU assets and liabilities.

30


FORM-10QSeptember 30, 2017

© 2018 Protiviti Inc. An Equal Opportunity Employer M/F/Disability/Veterans. Protiviti is not licensed or registered as a public accounting firm and does not issue opinions on financial statements or offer attestation services. All registered trademarks are the property of their respective owners.31

Q&A


OUR APPROACH TO A SUCCESSFUL TRANSITION


TRANSITIONCritical Success Factors

33

Gap AnalysisAnalyze current state and identify gaps with the requirements under the new standard.

ResourcingIdentify and assess resource needs for current state gap analysis, implementation, and project management throughout the transition timeline.

Communication StrategyDevelop a strategy for communicating with investors about the impact of transition to the new leasing standards.

EducationProvide awareness and education to all stakeholders.

Project ManagementManage the implementation process and provide for appropriate change management protocols.

1

2

3

4

5


TRANSITIONStructured Approach

34

Establish a Steering Committee

Perform Gap Analysis

Establish Transition Strategy (Remediation Recommendations)

Establish a Project Management Office

Assess Reporting CapabilitiesUpdate Critical

Accounting Policies

Update Financial Reporting

Controls

Update Financial Statements and

Other Reports

Transition Phases &

Key Elements

Protiviti’s approach to transition is divided into three phases – Analyze, Design, and Implement. Each phase addresses specific key transition elements.


TRANSITION Six Elements of Infrastructure

35

Methodology

Business Policies

Business Processes

People

Reporting

Systems and Data

Analyze

Methodology

Business Policies

Business Processes

Systems and Data

Reporting

PeopleAnalyze

During the Analyze Phase, it is important to consider the implications to your organization’s infrastructure. You can do this by using the Protiviti Six Elements of Infrastructure Model.


TRANSITIONCross-Functional Collaboration

36

• While CFOs will likely own the responsibility to assess the requirements of the new standard, its implications and the appropriate transition plan, the responsibility for the design and implementation of solutions must be cross-functional in nature.

• The effort itself, must be overseen through a project-driven discipline and approach (perhaps by a project management office (PMO) structure for large, complex organizations).

Responsibility

• Collaborative involvement and appropriate change management activities are critical to an effective and efficient lease transformation initiative.

• In particular, change management becomes a major determinant of success by overseeing the allocation of resources, establishing the transition framework and supporting appropriate training at all levels of the organization.

Cross-Functional and Collaborative Involvement

Procure-ment

Accounting & Finance

Legal

HR

Internal Audit

IT


TRANSITIONConsiderations to Estimate the Effort, Time and Cost Required for Transition

37

• Is your company a global organization? • What resources, both internal and external, are available to assist with the conversion? Do

you already have internal knowledge?• Are resources available from all affected areas of the organization, including IT and

operations, to participate in the project?• Is your organization highly centralized or decentralized?• Does your organization engage in extremely complex or sophisticated financial

transactions?• Does your organization use a common ERP system or multiple reporting systems?

• How resilient is your organization (i.e., how well does it embrace and adapt to change)?• Will your organization view the conversion as an opportunity to take a fresh look at

everything or just change what is required to change?• How well has your organization handled special long-term projects, such as Sarbanes-

Oxley Act compliance? • How familiar are your company’s external auditors, and specifically your audit team, with

the subject matter? • What are the impacts on your infrastructure?


OUR APPROACH TO A SUCCESSFUL TRANSITION

38

Q&A

here we go again€¦ · internal audit, risk, business & technology consulting here we go...

Documents