it’s back…accounting - sap fico training | sap consulting … · • trillions of dollars in...
TRANSCRIPT
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© 2016 ERP Corp. All rights reserved.
It’s Back…Accounting for Asset Leases…the new way!
Kent Bettisworth
BETTISWORTH & ASSOCIATES
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Controlling 2016 Conference
3
• 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/
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Topics
• Overview
• ASC842 Leases (United States)
• IFRS16 Leases (International)
• US vs International differences
• Impact
• Next Steps
• SummaryStart of first section:
List the main points in your presentation and insert this slide at
the start of each new topic. Move the highlighted box down for
each new section. This divides your presentation into easy to
follow sections.
4
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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
• ASC842 Leases (United States)
• IFRS16 Leases (International)
• US vs International differences
• Impact
• Next Steps
• SummaryStart of first section:
List the main points in your presentation and insert this slide at
the start of each new topic. Move the highlighted box down for
each new section. This divides your presentation into easy to
follow sections.
9
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Topics
• ASC842 (United States)
• Model
• Key differences
• Example
• Transition
Start of first section:
List the main points in your presentation and insert this slide at
the start of each new topic. Move the highlighted box down for
each new section. This divides your presentation into easy to
follow sections.
10
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ASC842 Model
11
• 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
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ASC842 Model specifics
12
• 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
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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
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ASC842 Example – Finance Lease
15 http://www.ey.com/UL/en/AccountingLink/Publications-library-Technical-Line
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ASC842 Example – Operating vs Finance Lease
16 http://www.ey.com/UL/en/AccountingLink/Publications-library-Technical-Line
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ASC842 Transition
17
• 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
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Topics
• Overview
• ASC842 Leases (United States)
• IFRS16 Leases (International)
• US vs International differences
• Impact
• Next Steps
• SummaryStart of first section:
List the main points in your presentation and insert this slide at
the start of each new topic. Move the highlighted box down for
each new section. This divides your presentation into easy to
follow sections.
18
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Topics
• International IFRS16
• Model
• Key differences
• Example
• Transition
Start of first section:
List the main points in your presentation and insert this slide at
the start of each new topic. Move the highlighted box down for
each new section. This divides your presentation into easy to
follow sections.
19
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IFRS16 Model
20
• 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 ($5000 suggested)
• How do I apply the principle?
• Identify a lease at inception
• Identify a asset (can be implied)
• Right to control and direct the use
• Evaluate for embedded leases in service contracts
• Record a right-of-use asset in PP&E at present value, plus
amortization over the lease life, and a lease liability
• Identify the lease payments, term and interest rate
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IFRS16 Key differences
IFRS16• All leases add Right-of-Use asset and
liability to balance sheet
• Except less than 12 months or,
• Low value
• In contracts, must separate leases from
services
• No separate Finance lease category
• Asset and liability valued at net present value
of lease payments over estimated term
• Right-of-Use asset is depreciated
• Lease liability is amortized
• Must identify a lease asset
• Can lessor substitute?
• Does lessee have control?
IAS17 Current
• Not limited to PP&E (2-4)
• Land and building are considered separately
(15)
• Unless land is immaterial (17)
• Finance (capital) lease where:
• Lease term extends over “major part” of asset
life (10c, 21)
• Lease payment present value covers
“substantially all” of asset fair value (10d)
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IFRS16 Example
22http://www.ey.com/Publication/vwLUAssets/Applying_IFRS_in_telecommunications_-
_IASB_issues_new_leases_standard/$FILE/Applying-Leases-Telcos-June2016.pdf
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IFRS16 Transition
23
• 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
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Topics
• Overview
• ASC842 Leases (United States)
• IFRS16 Leases (International)
• US vs International differences
• Financial Impact
• Next Steps
• SummaryStart of first section:
List the main points in your presentation and insert this slide at
the start of each new topic. Move the highlighted box down for
each new section. This divides your presentation into easy to
follow sections.
24
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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
• ASC842 Leases (United States)
• IFRS16 Leases (International)
• US vs International differences
• Impact
• Next Steps
• SummaryStart of first section:
List the main points in your presentation and insert this slide at
the start of each new topic. Move the highlighted box down for
each new section. This divides your presentation into easy to
follow sections.
26
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Transition Dates
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Who is affected?
28
http://explore.leaseaccelerator.com/wp-content/uploads/2016/01/Who-is-Most-Impacted-by-the-New-Lease-Accounting-Standards-d.pdf
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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
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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
• ASC842 Leases (United States)
• IFRS16 Leases (International)
• US vs International differences
• Impact
• Next Steps
• SummaryStart of first section:
List the main points in your presentation and insert this slide at
the start of each new topic. Move the highlighted box down for
each new section. This divides your presentation into easy to
follow sections.
31
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Next Steps
32
• 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
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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
36
• 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!
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Topics
• Overview
• ASC842 Leases (United States)
• IFRS16 Leases (International)
• US vs International differences
• Impact
• Next Steps
• SummaryStart of first section:
List the main points in your presentation and insert this slide at
the start of each new topic. Move the highlighted box down for
each new section. This divides your presentation into easy to
follow sections.
37
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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
www.bettisworthassociates.com
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