2016 a&e update_leases and new standards - hubbard - proofed by bs

Leases – A Practical Matter

Justin Hubbard, CPA, CGMAAssociate Director of Assurance

Services

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“One of my main goals in life is to one day fly on an airplane that actually appears on the balance sheet of an airline.”

~Quote by Sir David Tweedie, former IASB chair

Leases

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Leases

ASU No. 2016-02, Leases (Topic 842) Effective:

12/15/18 – Public 12/15/19 - Private

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Leases All leases on balance sheet

Capital Lease = Financing Lease Operating Lease = Operating Lease

$1.25 TRILLION

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Leases

Lease

Liability

Present value of

lease payments over lease

term

CREDIT

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Leases

DEBIT

ROU Asset

Lease liability

Direct costs

Less incentives received

Advance

payments

ROU = Right of use

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Leases

Lessee accounting

Right-of-use asset Lease liability

Single lease expense on a straight-line basis

Cash paid for lease payments

Right-of-use asset Lease liability

Amortization expense Interest expense

Cash paid for principal and interest payments

Finance Lease

Operating

Lease

Balance Sheet

Income Statement Cash Flow Statement

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Example Company J leases machine from

Company M. 3 annual payments as follows: 3.74%

Year Amount1 $100,0002 $350,0003 $200,000

Total $650,000

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Example Current Accounting

Operating lease – Expense based on outflows

Capital lease – Asset of $600,000 Liability of $600,000 Interest expense over 3 years = $50,000 Depreciation expense over 3 years =

$600,000

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Example

Under ASU 2016-02

Lease expense = the sum of lease payments / termAdjustments to ROU Asset = diff between lease expense and interest expense

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Example – AJE’s

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Leases

Disclosures: A lessee shall disclose all of the

following: Description of leases Basis, terms and conditions of any

variable payments Options to extend Residual value guarantees Covenants Maturity analysis

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Leases Disclosures:

A lessor shall disclose all of the following: Description of leases Basis, terms and conditions of any variable

payments Options to extend Option to purchase Significant assumptions in determining

existence of lease Allocation between lease and nonlease

components

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Implications

Key Metrics and Debt CovenantsMetric EffectCurrent Ratio – Current Assets/Current Liabilities

Decrease

Leverage Ratio – Debt/Equity IncreaseReturn on Assets – Net income/Assets

Decrease

Debt to EBITDA – Debt/EBITDA Increase

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Implications

Key Metrics and Debt CovenantsCovenant EffectNew debt capacity DecreaseCapital expenditure capacity DecreaseEBITDA Varies

EBITDA – add back amortization and interest expense (financing lease)

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ImplementationEngage Stakeholders• Discuss financial impact• Agree on end result• Tax, vendors, legal, IT,

policies

Create Plan• Departmental ownership• ID key steps / milestones• IT

Data• Organize agreements• Complete population

Analyze• Establish templates• IT automation• Prepare JE’s• Proforma FS

Execute•Record entries•Finalize policies

Re-Evaluate

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Benefits Visibility to all leases

Ability to ID waste Cost optimization

Leverage volume of leases for improved terms

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Obstacles

Locating the lease agreements

Collecting necessary data on all organizational leases in a centralized, electronic inventory could be a huge obstacle.

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Obstacles

Outdated leasing systems

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Tools

Software / Vendors Document abstraction software iLeasePro Lease Accelerator

Dean Dorton Lease database Ongoing analysis Sync with tax and financial goals

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Obstacles

More than just an “accounting change”

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Impact

Lease vs. buy

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Resources

AICPA Financial Reporting Center Home > Interest Areas > Financial Reporting

Center > Accounting and Financial Reporting > Leases

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“(Help) Wanted: For hazardous journey. Small wages, bitter cold, long months of complete darkness, constant danger, safe return doubtful. Honour and recognition in case of success.”

Earnest Shackleton – polar explorer, early 20th century

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To further complicate matters..

New Stuff!!Year # of ASUs2016 17 through

October2015 172014 182013 12

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Recent Standards

Consolidation: Interests Held through Related Parties that are under Common Control•FY After 12/15/16 (public), 2017 (private)

2016-17

Accounting for Income Taxes: Intra-Entity Asset Transfers•FY After 12/15/17 (public), 2018 (private)

2016-16

Statement of Cash Flows: Classification of Certain Cash Receipts and Cash Payments•FY After 12/15/17 (public), 2018 (private)

2016-15

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Recent Standards

Financial Statements of Not-For-Profits•FY After 12/15/17

2016-14

Accounting for Financial Instruments – Credit Losses•FY After 12/15/19 (public), 2020 (private)

2016-13

Employee Share-Based Payment Accounting Improvements•FY after 12/15/16 (public), 2017 (private)

2016-09

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Recent Standards

Simplifying the Transition to the Equity Method of Accounting•FY after 12/15/16

2016-07

Contingent Put and Call Options in Debt Instruments•FY After 12/15/16 (public), 2017 (private)

2016-06

Effect of Derivative Contract Novations on Existing Hedge Accounting Relationships•FY After 12/15/16 (public), 2017 (private)

2016-05

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Recent StandardsRecognition of Breakage for Prepaid Stored-Value Products•FY After 12/15/17 (public), 2018 (private)

2016-04

Goodwill/Business Combinations/Consolidation/Derivatives & Hedging• Effective immediately

2016-03

Accounting for Financial Instruments – Classification and Measurement•FY After 12/15/17 (public), 2018 (private)

2016-01

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Revenue Standard (606) Updates

2016-12 – Narrow Scope Improvements

•Collectability•Sales Taxes•Contracts at time of transition

2016-10 – Identifying performance obligations

• Clarifies contractual provisions requiring an entity to transfer control• “Promise” to transfer goods

2016-08 – Principal vs. Agent

Considerations•Clarifies determination of principal vsagent

•Clarifies determination of goods/services

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Emerging Issues Continued “Simplification” Emphasis on Fair Value Disclosure Framework Project

Justin Hubbard, CPA, CGMAAssociate Director of Assurance

Servicesjhubbard@deandorton.com

859.425.7604