the leases are coming… to your balance sheet...the leases are coming… to your balance sheet...
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The Leases are coming… to your balance sheet
December 11, 2017
Marybeth ShamrockAccounting Change Services Leader and Advisory Leasing LeaderKPMG LLP
Shane HendricksKPMG Leasing Tool Implementation LeaderKPMG LLP
Shari MagerPartner, Accounting Advisory ServicesKPMG LLP
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Agenda
Current State of Affairs
Effective Implementation
Question and Answer Session
What Preparers Have Said: Results from KPMG’s recent accounting change survey
Our Perspective
Current state of affairs
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Effective dates
Public business entities, certain not-for-profit entities, and certain employee benefit plans
— Interim and annual periods in fiscal years beginning after December 15, 2018
All other entities — Annual periods in fiscal years beginning after December 15, 2019, and interim periods in fiscal years beginning one year later
Early Adoption — Early adoption permitted for all entities at any time after issuance
Date of initial application — The first day of the earliest comparative period presented in the first annual financial statements post-effective date
Transition Relief — The board has proposed an amendment to give all companies the option to use the effective date of the new leases standard as their date of initial application in transition
— Companies that elect this transition option would not have to adjust their comparative financial statements for effects of the new standard or make the new required lease disclosures for periods before the effective date
Effective implementation
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Potential impacts of lease accounting changes
Accounting and Reporting Impacts— Increased management judgment — Potential for increased level of effort/reporting volatility— Potential dual reporting (U.S. GAAP and IFRS) — New ROU assets can be impaired— New book-tax differences — New accounting policies and procedures— Significant new disclosure requirements— Opening balance sheet and comparative
periods— Transition & ongoing external audit
effort
Systems & Processes Impacts— Existing lease systems functionality shortfalls— Need complete lease inventory— Capturing salient lease terms in a database— Expanded data needs may necessitate a need for
forecasting and other systems— Increased management judgment — Changes to process documentation and
SOX 404 testing will be required
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Potential impacts of lease accounting changes (continued)
People & Change Impacts— Need for strong project management
office — Effective governance structure and
communication protocols— Communication and training to
impacted departments — Support of the conversion project
and ongoing accounting— Other departments potentially
affected: FP&A and Tax
Business Impacts— Moderate to significant changes for
- Lessees- ROA calculations- Current ratios - Debt-to-asset ratio- Leverage ratios
— Buy versus lease decisions— Potential need to renegotiate current lease terms— Potential impact on state and local taxes paid (e.g.,
apportionment of taxable income)
What preparers have said
Results from KPMG’s recent accounting change survey
10© 2017 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. NDPPS 725567
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Expected level of impact of new leases standardQ. What level of impact do you expect in each of the following areas as a result of the new leases standard? Rate each on a scale of 1 to 5 (1 = no impact, 5 = significant impact):
77%
62%
56%
57%
56%
55%
46%
37%
16%
19%
15%
27%
32%
27%
29%
25%
25%
24%
28%
26%
8%
12%
12%
15%
16%
20%
29%
39%
56%
55%
0% 20% 40% 60% 80% 100%
Other
Investor relations / communications
Tax reporting
Leasing practices (lease vs. purchase decisions)
Operations
Income statement
Financial ratios / debt covenants
Systems
Disclosures / reporting
Balance sheet
1-2 3 4-5
Mean
3.7
2.4
3.6
3.1
2.8
2.6
2.4
2.4
2.2
1.7
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Progress on implementation to the new leases standardQ. Please indicate the progress your organization has made against each of the following implementation activities related to the new leases standard:
32%
66%
59%
74%
67%
43%
61%
55%
35%
51%
23%
23%
3%
32%
33%
21%
28%
52%
23%
35%
51%
23%
47%
25%
2%
5%
2%
4%
4%
5%
6%
13%
16%
28%
49%
64%
<1%
3%
3%
1%
1%
11%
3%
1%
10%
2%
4%
0% 20% 40% 60% 80% 100%
Other
Complete implementation
Conduct training
Analyze tax impacts
Calculate the transition impact
Gather and validate data
Design software or process solution
Develop system or process requirements
Perform accounting assessment
Select lease accounting software
Perform lease inventory
Establish program management team
No progress Some progress Activity completed Not applicable
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Challenges in implementing the new leases standardQ. What challenges are you facing related to the implementation of the new leases standard that you did not anticipate?*
0%
22%
11%
33%
11%
44%
11%
44%
78%
11%
19%
22%
24%
33%
35%
41%
48%
44%
10%
19%
21%
25%
30%
37%
37%
48%
49%
0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%
Other
Defining a lease
Reporting on the proper accounting treatment and disclosures
Estimating operating costs or service components in leases toexclude from capitalization
Establishing assumptions and inputs such as discount rate andlikelihood of renewal
Locating a lease
Abstracting and entering leases into a leasing system
Selecting and implementing an adequate leasing system
Identifying embedded leases
Total (n = 63) Public (n = 54) Private (n = 9*)
* Among those who selected “Yes, there are surprises that we did not anticipate” when asked about unanticipated challenges related to the leases implementation effort
Other includes:
— Identifying all leases
— Joint operations effect on leases and disclosures
— Open issue with easements
— Separating non-lease components
— Standard setter feedback
— Using hindsight as a practical expedient
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Expected time to implement changes to existing system or new software solutionQ. The total amount of time to implement changes to existing system or new software solution for the new leases standard is expected to be:
42%
8%
7%
15%
17%
10%
42%
17%
8%
8%
13%
13%
42%
15%
7%
10%
14%
12%
0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%
Do not know / Not sure
Over 12 months
10 to 12 months
7 to 9 months
4 to 6 months
1 to 3 months
Total (n = 241) Public (n = 182) Private (n = 59)
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Early adoption of the new leases standardQ. Has/will your organization early adopt(ed) the new leases standard?
8%
81%
11%8%
83%
10%8%
75%
17%
0%
20%
40%
60%
80%
100%
Yes No Do not know / Not sure
Total (n = 245) Public (n = 186) Private (n = 59)
Our perspective
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Where the work is…
— Identify project team and objectives
— Establish governance protocols
Low— Identify in-scope
population of lease agreements
Medium
— Populate a database of lease terms
— Model and respond to business impacts
High
— Consolidate lease accounting systems/spreadsheets
— Update lease accounting policies and procedures
— Assign accounting assumptions and pool similar leases
— Prepare transitional financial statements and disclosures
— Transition to future state leasing process
Future
How to get there…
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Where to begin: Develop a structured approach
After identifying a project team, determine the best approach to achieve your objectives...
Advantages:— Supports consistency of data capture— Controlled, easy-to-oversee— Establish center of excellence— Streamline timing of data Disadvantages:— May not be a viable go-forward model— Challenges presented with leases in other languages— Requires full-time project team
Centralized
Advantages:— Establishes a viable go-forward process— Easier for individual BU reconciliations/processing— Eliminates language challenges— Obtain greater buy-in across the organizationDisadvantages:— Requires extensive training and communication— Difficult to ensure consistency of data capture— Prolonged close process
Decentralized
Considerations— Personnel & other
resources— Timeline — Nature of operations— Risks— Current location/state
of lease data
Hybrid Approach
Outsource Lease Abstraction
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Why is it important to start now?
Is the lease population complete??
Does the company have systems and/or processes to store data and facilitate Day 2 accounting consequences like reassessment, impairment?
— Contract reviews for potential embedded leases— Leases previously not identified as leases
Resource needs for data abstraction (additional data needed for accounting and new disclosures)??
Who will make and review lease-by-lease accounting estimates (e.g., residual value, discount rate, reasonably certain assessment, or others)??
?
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Questions to consider when selecting a lease accounting system
Does the application fully support foreign currency needs?
Does it capture items such as variable lease payments, short term leases, the weighted average remaining lease term, or weighted average discount rate to fully support the disclosure requirements?
Does it support tracking and recording impairments of ROU Assets? Reassessments? Modifications?
Will the application or its sponsors be able to provide support for ongoing updates as additional interpretive guidance and best practices emerge over the next few years?
Does the application have features that support effective project management and oversight of the accounting change project, which will entail the management of thousands of leases?
1
2
4
5
6
3
Does the application support dual reporting?
Question and answer session
Thank you
Contact usMarybeth ShamrockAccounting Change Services Leader and Advisory Leasing LeaderKPMG LLPT: 216-875-8158E: mshamrock@kpmg.com
Shane HendricksKPMG Leasing Tool Implementation LeaderKPMG LLPT: 214-840-2063E: shanehendricks@kpmg.com
Shari MagerPartner, Accounting Advisory ServicesT: 408-367-7661E: smager@kpmg.com
© 2017 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. NDPPS 725567
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