ASU 2016-02 September 20, 2017 Meet the Speakers Tonisha Spratte, - - PowerPoint PPT Presentation

Leases – ASU 2016-02

September 20, 2017

Meet the Speakers

Tonisha Spratte, CPA Senior Accountant Cherry Bekaert tspratte@cbh.com Matthew Mars Senior Accountant Cherry Bekaert mmars@cbh.com

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Agenda

What is a Lease? What are the Lease Classifications? How do we initially Recognize a Lease? Subsequent Measurement Disclosures

My dream is that one day I’ll fly on an airplane that is on an airline balance sheet.

• Sir David Tweedie, IASB Chair

It Started with a Dream

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• 1. Improve Financial

Reporting about Leasing Transactions

• 2. Comparability to IFRS

Its all about Good Intentions:

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 In 1974, there were only $11B in operating leases  In 1975, it was up to $100B (after FAS 13 was adopted)  As of 2015, operating leases make up over $3T and comprise 88% of all leases

A quick history lesson

Definition

A contract, or part of a contract, that conveys the right to control the use of identified property, plant, or equipment (an identified asset) for a period of time in exchange for consideration.

Control

Substantially all of the economic benefits Right to direct the use

Considerations

Substantive Substitution Rights Protective Rights

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Not in Scope

Intangible assets Nonregenerative resources Biological assets Inventory

Steps

Step 1 - Determine whether a contract contains a lease Step 2 - Identify the separate lease components within the contract Steps 3 - The consideration in the contract shall be allocated to each separate lease component and nonlease component of the contract

Lease Classification

Classify each separate lease component at the commencement date. Do not reassess the lease classification after the commencement date unless the contract is modified and the modification is not accounted for as a separate contract

Lease Term

Noncancellable period Option to terminate Option to extend

• 1. Transfer of ownership
• 2. Bargain purchase option
• 3. Lease term >=75% of useful life
• 4. PV of min. payments >=90% of FV

Capital Lease Accounting – Current (ASC840)

1.

• 1. Transfer of ownership

2.

• 2. Option to purchase is reasonably certain

3.

• 3. Lease term is a “major part” of the economic life

4.

• 4. Asset is specialized in nature

5.

• 5. PV of lease payments is “substantially all” of the FV

Financing Lease - New

Operating Lease

Any lease other than a finance lease

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Transition

Modified retrospective approach Practical expedients

• Continue to account for leases that commence before the

effective date in accordance with previous GAAP unless the lease is modified

• Exception - Required to recognize a right-of-use asset and a

lease liability for all operating leases based on remaining minimum rental payments that were tracked and disclosed under previous GAAP

Recognition

Lease Liability Right-of-use asset

Lease Liability

PV of lease payments

Fixed payments Exercise price of

• ptions

Penalties Residual value guarantees Certain variable lease payments Optional periods Purchase price

Do Not Include

Certain variable lease payments Guarantee of the lessor’s debt Nonlease components

Discount Rate

Rate implicit in the lease Incremental borrowing rate Risk Free Rate

Asset Recognition

Lease liability Prepayments Lease incentives Initial direct costs

A lease that, at the commencement date, has a lease term of 12 months or less and does not include an option to purchase the underlying asset that the lessee is reasonably certain to exercise.

Short-Term Leases

Finance Lease

Income Statement

Amortization of ROU Asset Straight line Shorter of economic life

• r lease term

Exception – ownership transfer or option to purchase

Income Statement

Interest Expense

• Discount Rate * Lease Liability
• Interest decreases over time
• Principal pay down increases
• ver time

Expense payments not included in the liability

Financing

Amort Exp Amortized ROU Accum Amort Amortized ROU Lease Liab Actual less interest Interest Exp Rate x Liab Cash Actual Year 1 ROU Asset $ XXX Lease Liab $ XXX At inception

Example

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Balance Sheet

Right of Use Asset

• Net of amortization
• Test for impairment

Lease Liability

• Increases with accrual of

interest

• Decreases with lease

payment

Operating Lease

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Income Statement

Single Lease Cost

• Calculate interest (liability * discount rate)
• Calculate amortization (lease payment –

interest)

• Charge interest and amortization to lease

expense

• No charge to interest and amortization

Expense variable lease payments not included in liability

Operating

Lease Expense Amortized asset Lease Liab Actual less interest Accum Amort Plug Cash Actual Year 1 ROU Asset $ XXX Lease Liab $ XXX At inception

Example

Balance Sheet

Right of use asset

• Amortized (lease payment –

interest calc)

• Increasing amortization
• Test for impairment

Lease Liability

• Increase with interest

calculation

• Decrease with payment

Summary

Financing Lease Operating Lease

Initial Recognition (Right of use asset & Lease liability) PV of lease payments PV of lease payments Income Statement Interest expense Amortization (depreciation) expense Straight-line Lease expense Asset Accretion Amortization/depreciation (ex. straight-line) Lease expense less interest expense Liability Accretion Interest method Interest method

Comparison

Presentation

Present finance lease right-of-use assets and operating lease right-of-use assets separately from each other and from other assets Present finance lease liabilities and operating lease liabilities separately from each other and from other liabilities

Qualitative Lessee Disclosures

Nature of leases Terms and conditions of sale-leaseback transactions Information about leases not yet commenced Leases between related parties Significant assumptions and judgments Short-term lease exemption policy Use of practical expedient *Items in orange indicate new disclosure requirement

Quantitative Lessee Disclosures

Finance, Operating, Short-term and Variable lease costs Supplemental noncash info on lease liabilities from obtaining ROU assets Sublease income Weighted average remaining lease term and discount rate Net gains (losses) on sale-leaseback transactions 5-year Maturity analysis Cash paid for amounts included in measurement of lease liabilities *Items in orange indicate new disclosure requirement

 According to Chang & Adams Consulting, the new standard could have the following effects:

• Increase public company

liabilities by $1.5T

• Increase costs by $10.2B / yr
• Potential job losses of 190,000
• Lower US GDP by $27.5B / yr

Is Doomsday Upon Us?

When do I have to do anything?

Public Entities – FYB > 12/15/18 All other Entities – FYB > 12/15/19 Early adoption is permitted

Questions & Comments?

Tonisha Spratte| Senior Assurance Services tspratte@cbh.com Matthew Mars| Senior Assurance Services mmars@cbh.com