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It’s Back…Accounting for Asset Leases…the new way!

Kent Bettisworth

BETTISWORTH & ASSOCIATES

Controlling 2016 Conference

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• September 12-15, 2016 in San Diego

• Kent Bettisworth presenting sessions on:

• Top 10 best practices for year-end closing in PS and AA

• Important revenue recognition changes are coming…are you

ready?

• http://controlling.erpcorp.com/

Topics

• Overview

• ASC842 Leases (United States)

• IFRS16 Leases (International)

• US vs International differences

• Impact

• Next Steps

• SummaryStart of first section:

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the start of each new topic. Move the highlighted box down for

each new section. This divides your presentation into easy to

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Introduction

• Trillions of dollars in capital and operating lease assets will be

added to balance sheets as right-to-use (ROU) assets starting

with 2019 or earlier. Leasing is an important activity to finance

and gain access to assets and reduce an organization’s

exposure to the risks of asset ownership. The current off-

balance sheet accounting has been criticized for years. Finally,

the accounting boards have converged on a new standard

effective in 2019.

• This session will educate you on what this means for your

company as a lessee.

• What are the new rules?

• How will US accounting differ from the rest of the world?

• What should my company do to prepare?

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Poll

1. Does your company have an active project to

implement the new Lease Accounting standard?

Yes

No

2. If yes, what stage are you in?

Not started

Initial evaluation

Design

Build

Test

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Overview of Terms

• ASC – Accounting Standards Codification (US)

• Effective July 1, 2009; consolidated/organized US standards

• IAS – International Accounting Standards

• Specific international accounting standards

• IASB – International Accounting Standards Board

• IFRS – International Financial Reporting Standards

• Convergence-related international standards prepared jointly

by IASB and FASB organizations

• FASB – Financial Accounting Standards Board (US)

• SEC – Securities and Exchange Commission (US)

• Regulator of financial reporting for US stock exchange listed

companies

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Leases – New Standards Approved

• A new standard was approved in

• Lease financing totaled $3.3 trillion in 2016

• Existing standards lack clarity, comparability, and are complex

• Financial statement users often adjust for operating lease values

• IAS16 and ASC842 supersede IAS17 and ASC840, respectively

• The new standard:

• Ensures all assets and liabilities arising from leases are reflected in the financial statements

• Consistent with the conceptual framework definition of assets and liabilities

• Consistent with the new revenue recognition standard

Hans Hoogervorst, IASB Chairman, Shining the Light on Leases, March 26, 2016

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Topics

• Overview




• Impact

• Next Steps





follow sections.

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Topics

• ASC842 (United States)

• Model

• Key differences

• Example

• Transition

Start of first section:




follow sections.

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ASC842 Model

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• Who is affected?

• Any entity that enters into lease contracts except:

• Intangibles, oil & gas leases, biologic, inventory, nor under

construction assets or,

• Less than 12 months term or apply capitalization threshold

• How do I apply the principle?

• Identify a lease at inception as operating or finance

• Identify a physical asset (can be implied)

• Right to control and direct the use

• Evaluate for embedded leases in service contracts

• Separate lease and non-lease components

• Record a right-of-use asset in PP&E at present value, plus

amortization over the lease life, and a lease liability

• Identify the lease payments, term and interest rate

ASC842 Model specifics

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• For Operating leases:

• Recognize a single lease cost

• Calculated as interest + amortization

• Amortization = straight-line expense less interest for the period

• Allocated over the lease term on a straight-line basis

• Classify cash payments within operating activity cash flow

• For Finance leases:

• You will own the asset or have used the major part of the

assets economic life

• Recognize interest on the lease liability separate from the

amortization of the right-of-use asset

• Classify amortization within financing activities

• Classify interest payments within operating activity cash flow

ASC842 Key differences

ASC842 (ASU2016-2)

• All leases added to balance sheet

• Operating and Finance leases are identified separately

• Finance lease if ownership transferred

• No 25%, 75%, or 90% ‘bright’ lines

• Assess contracts for embedded leases

• Exclude non-lease components

• Contract contains a lease if asset is

• Controlled by lessee

• Physically identified

• Balance sheet valuation

• Asset and liability valued at net present value of lease payments over estimated term

• Operating lease is single lease expense (calculated as interest expense plus amortization)

• Finance lease is separate interest and amortization expenses

ASC840 Current

• Land is considered separately

• Only if 25% of lease fair value

• Capital lease where

• Lease term > 75% of asset life

• Lease payment present value > 90% of

asset fair value

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ASC842 Example – Operating Lease

14 http://www.ey.com/UL/en/AccountingLink/Publications-library-Technical-Line

ASC842 Example – Finance Lease


ASC842 Example – Operating vs Finance Lease


ASC842 Transition

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• Early adoption allowed

• Modified retrospective

• Apply new guidance at beginning of earliest comparison

period

• For annual and interim financial statements

• Practical expedient election for leases before effective date

• No need to reassess for embedded leases

• No need to reassess for operating versus finance

• No need to reassess for initial direct costs

• May elect to use hindsight in determining option lease terms

Topics

• Overview




• Impact

• Next Steps





follow sections.

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Topics

• International IFRS16

• Model

• Key differences

• Example

• Transition

Start of first section:




follow sections.

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IFRS16 Model

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• Who is affected?

• Any entity that enters into lease contracts except:

• Intangibles, oil & gas leases, biologic, inventory, nor under

construction assets or,

• Less than 12 months term or,

• Low value ($5000 suggested)

• How do I apply the principle?

• Identify a lease at inception

• Identify a asset (can be implied)

• Right to control and direct the use

• Evaluate for embedded leases in service contracts

• Record a right-of-use asset in PP&E at present value, plus

amortization over the lease life, and a lease liability

• Identify the lease payments, term and interest rate

IFRS16 Key differences

IFRS16• All leases add Right-of-Use asset and

liability to balance sheet

• Except less than 12 months or,

• Low value

• In contracts, must separate leases from

services

• No separate Finance lease category

• Asset and liability valued at net present value

of lease payments over estimated term

• Right-of-Use asset is depreciated

• Lease liability is amortized

• Must identify a lease asset

• Can lessor substitute?

• Does lessee have control?

IAS17 Current

• Not limited to PP&E (2-4)

• Land and building are considered separately

(15)

• Unless land is immaterial (17)

• Finance (capital) lease where:

• Lease term extends over “major part” of asset

life (10c, 21)

• Lease payment present value covers

“substantially all” of asset fair value (10d)

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IFRS16 Example

22http://www.ey.com/Publication/vwLUAssets/Applying_IFRS_in_telecommunications_-

_IASB_issues_new_leases_standard/$FILE/Applying-Leases-Telcos-June2016.pdf

IFRS16 Transition

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• Must choose full or modified retrospective approach

• Applied to entire lease portfolio

• Not required to reassess existing contracts

• Full retrospective approach requires:

• Apply to all prior reporting periods as defined by IAS8

Accounting Policies, Changes in Accounting Estimates

• Adjust balance sheet at beginning of the earliest comparative

period presented

• Modified retrospective approach requires:

• Recognize cumulative effect as an adjustment on effective

date

• Can apply practical expedients on lease-by-lease basis

Topics

• Overview




• Financial Impact

• Next Steps





follow sections.

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US vs International Differences

IFRS16• Definition

• Does not separate finance and operating leases

• No requirement to separate land

• Not necessarily a physical asset

• Measurement

• Exempt low value of less than $5000

• Allows alternative valuation bases

• Variable Payments

• Measure again if index rate changes

• No separate guidance for private companies

• Statement of Cash Flows

• Interest classed optionally as operating, investing, or financing activities

• Impairment follows IASB

• Transition

• Adopt early if also adopting new Revenue Recognition standard

ASC842• Definition

• Separate guidance for finance and operating leases

• Land is treated as separate lease

• Generally is a physical asset

• Measurement

• No explicit low value (use capitalization threshold)

• Variable Payments

• Do not measure again

• Private companies guidance

• Statement of Cash Flows

• Interest is operating activity

• Amortization is financing

• Impairment follows FASB

• Transition

• Adopt early allowed

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Topics

• Overview




• Impact

• Next Steps





follow sections.

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Transition Dates

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Who is affected?

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http://explore.leaseaccelerator.com/wp-content/uploads/2016/01/Who-is-Most-Impacted-by-the-New-Lease-Accounting-Standards-d.pdf

What is the Impact on Processes & Income

• Business processes

• Creates a high volume of new

assets

• Value from present value

calculations

• Income statement

• Lessee – EBIDTA may improve

• Lease expense decreases

• Interest expense increases

• Amortization expense increases

• Lessor – EPS timing changes

• Interest revenue may increase

• Longer lease life spreads out

timing29

What is the Impact on the Balance Sheet & Disclosures

• Balance sheet

• Lessee – ROI reduced

• Right-of-use assets increase

• Debt covenants may be

impacted

• Disclosure

• Operating leases removed from

footnotes

• Replaced with extensive

qualitative and quantitative

explanations of judgement

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Topics

• Overview




• Impact

• Next Steps





follow sections.

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Next Steps

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• Establish a project team

• Who and what is their charter?

• Start communicating with affected stakeholders

• Investors, Employees, Lease Vendors

• Connect with FASB/IAS lease advisory groups

• Develop early assessment of impact on:

• Finance including tax impacts

• Processes including training

• Systems including new controls

Early Assessment

• Expert examination of classification changes

• Review existing leases for classification changes

• Do you have the right data to assess the new standard?

• Need to separate lease and non-lease components

• Estimate the financial effect of the change

• Acquisition and Liability value based on present value

• Amortized life based on longest life when considering renewal options

• What is the interest rate?

• Candidates for process improvement opportunities?

• Should you renegotiate certain operating leases?

• Should you eliminate inefficiency and automate hand-offs between purchasing/payables/receivables and fixed assets?

• How do you incorporate lease assets into the capital budget?

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Implementation Assessment

• Identify who and the type of training required

• Business line, accountants, systems support

• Adapt lease management process and systems

• Is this process automated?

• What is the right system to manage lease assets?

• Can you use SAP’s “lessee” simple asset lease functionality

for short term?

• Identify the conversion method

• How many leases will reclassify?

• How many new lease assets are required?

• How to create new right-to-use assets and liabilities?

• What is the approach for transition leases?

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SAP Solutions Review

Lease accounting processes in SAP for

lessor and lessee

• Master data

• New asset classes

• Review accounting principles

• Transactions

• Review for alignment with parallel ledger

or parallel account for IFRS

• Cross-system integration

SPRO > Financial Accounting > Lease Accounting (Lessor)

SPRO > Financial Accounting > Asset Accounting > Special Valuation >

Leasing (Lessee)

Source: help.sap.com > SAP ERP Central Component > Financials >

Financial Accounting (FI) > Lease Accounting (FI-LA for Lessor)

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Other Solutions to Review

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• Nakisa is supported and sold by SAP

• http://www.nakisa.com/lease-accounting-software

• Visual Lease software

• http://www.visuallease.com/fasb/

• Lease Accelerator software

• http://explore.leaseaccelerator.com/products/lease-

accounting-software/

• AMT Direct

• http://www.amtdirect.com/solutions/fasb-administration

NOTE: Buyer beware!

Topics

• Overview




• Impact

• Next Steps





follow sections.

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Key Point to Take Home

• Assessment for Lease Accounting must start now!

• Establish your project team

• Stay up-to-date with FASB/IAS Lease implementation advice

• Learn the financial and process impact to your company sooner

rather than later!

• Evaluate vendor solutions for robustness and fit with existing

ERP system

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Resources

• www.ifrs.org

• http://www.ifrs.org/Current-Projects/IASB-Projects/Leases/Documents/IFRS_16_project-summary.pdf

• www.fasb.org

• http://www.fasb.org/jsp/FASB/Document_C/DocumentPage?cid=1176167901010&acceptedDisclaimer=true

• www.iasb.org

• International Accounting Standards Board (IASB)

• www.iasb.org/IFRSs/IFRs.htm

• International Financial Reporting Standards (IFRS)

• http://asc.fasb.org

• Accounting Standards Codification (ASC)

• www.sdn.sap.com/irj/bpx/ifrs

• SAP community forum for IFRS discussions and information

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Questions

Q&A40

Kent Bettisworth

BETTISWORTH & ASSOCIATES, INC.

713-467-8374

[email protected]

www.bettisworthassociates.com

mailto:[email protected]

http://www.bettisworthassociates.com/

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