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 Matthew Mars Senior Accountant Senior Accountant Cherry Bekaert Cherry Bekaert tspratte@cbh.com mmars@cbh.com

Agenda  What is a Lease?  What are the Lease Classifications?  How do we initially Recognize a Lease?  Subsequent Measurement  Disclosures 3

It Started with a Dream My dream is that one day I’ll fly on an airplane that is on an airline balance sheet. -Sir David Tweedie, IASB Chair 4

Its all about Good Intentions: 1. Improve Financial Reporting about Leasing Transactions 2. Comparability to IFRS 5

A quick history lesson  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

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 Right to direct the use economic benefits

Considerations Substantive Protective Rights Substitution Rights 9

Not in Scope Nonregenerative Intangible assets Biological assets Inventory resources

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

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 Option to period terminate Option to extend

Capital Lease Accounting – Current (ASC840) 1. Transfer of ownership 2. Bargain purchase option 3. Lease term >=75% of useful life 4. PV of min. payments >=90% of FV

Financing Lease - New 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

Operating Lease Any lease other than a finance lease

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 17

Recognition Lease Liability Right-of-use asset

Lease Liability PV of lease payments Certain Exercise Residual Fixed variable Optional Purchase price of Penalties value payments lease periods price options guarantees payments

Do Not Include Certain variable Guarantee of the Nonlease lease payments lessor’s debt components

Discount Rate Rate implicit in Incremental Risk Free Rate the lease borrowing rate

Asset Recognition Lease Initial direct Lease liability Prepayments incentives costs

Short-Term Leases 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.

Finance Lease

Income Statement Amortization of ROU Asset Straight line Shorter of economic life or lease term Exception – ownership transfer or option to purchase

Income Statement Interest Expense • Discount Rate * Lease Liability Expense payments not • Interest decreases over time included in the liability • Principal pay down increases over time

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

Balance Sheet Right of Use Asset Lease Liability • Net of amortization • Increases with accrual of interest • Test for impairment • Decreases with lease payment 28

Operating Lease 29

Income Statement Single Lease Cost Expense variable lease • Calculate interest (liability * discount rate) • Calculate amortization (lease payment – payments not included in interest) liability • Charge interest and amortization to lease expense • No charge to interest and amortization

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

Balance Sheet Right of use asset Lease Liability • Amortized (lease payment – • Increase with interest interest calc) calculation • Increasing amortization • Decrease with payment • Test for impairment

Summary

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

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

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

Is Doomsday Upon Us?  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

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