Overview of the New Leases Standard MBAF Welcomes You! October 25, 2018 1
Agenda • Overview • Implementation considerations 2
Overview Effective Date – The FASB’s new leases standard requires lessees to recognize assets and liabilities for most leases (including operating leases) but recognize expenses in a manner similar to today’s accounting. – For lessors, the new guidance modifies the lease classification criteria and leverages certain guidance in the new revenue recognition standard. – The new leases guidance eliminates today’s real estate -specific provisions, changes sale and leaseback accounting and eliminates leveraged lease accounting prospectively. – The effect on financial statements, business processes and internal controls will likely be significant for some entities. – Effective date • Public business entities (PBEs) and certain not-for-profit entities and employee benefit plans – annual periods beginning after 15 December 2018, and interim periods within those years • All other entities – annual periods beginning after 15 December 2019, and interim periods the following year • Early adoption permitted for all entities 3
Overview Effective Date • Dates shown are for calendar year-end entities Effective date First presentation Mandatory adoption Public ▪ 1 Jan 2019 ▪ 31 March 2019 10-Q Nonpublic ▪ 1 Jan 2020 ▪ 31 Dec 2020 annual F/S Early adoption Public 1 Jan 2018 31 March 2018 10-Q ▪ ▪ ▪ 31 March 2018 interim F/S ▪ 1 Jan 2018 31 Dec 2018 annual F/S ▪ Nonpublic ▪ 31 March 2019 interim F/S 1 Jan 2019 ▪ ▪ 31 Dec 2019 annual F/S ▪ 1 Jan 2020 ▪ 31 March 2020 interim F/S 4
Overview Scope and Scope Exceptions – The guidance applies to: • Leases of property, plant, and equipment – The guidance does not apply to: • Leases of inventory, intangible assets, assets under construction, and biological assets, including timber • For lessors, the new guidance modifies the lease classification criteria and leverages certain guidance in the new revenue recognition standard. • Leases to explore for or use minerals, oil, natural gas and similar non-regenerative resources – Leases of equipment used to explore for natural resources are not part of this scope exception (i.e., they are in the scope of ASC 842). • Arrangements in the scope of ASC 853, Service Concession Arrangements – Definition: • A lease is 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. 5
Overview Criteria for lease classification - Lessees At the commencement date, a lease is a finance lease if it meets any one of the criteria below; otherwise, the lease is an operating lease. The lease transfers ownership of the underlying asset to the lessee by the end of ▪ the lease term. The lease grants the lessee an option to purchase the underlying asset that the ▪ lessee is reasonably certain to exercise. The lease term is for the major part of the remaining economic life of the ▪ underlying asset*. The present value of the sum of the lease payments and any residual value ▪ guaranteed by the lessee that is not already reflected in the lease payments equals or exceeds substantially all of the fair value of the underlying asset. The underlying asset is of such a specialized nature that it is expected to have no ▪ alternative use to the lessor at the end of the lease term l *Not applicable for leases that commence at or near the end of the underlying asset’s economic life ease term. ► 6
Overview Lessee Accounting – Recognition and Measurement Operating leases Finance leases (1) and lease liability at the present value of the lease Initial recognition and Initially measure the right-of-use (ROU) asset measurement payments to be made over the lease term Measure the lease liability at the present Accrete the lease liability based on the interest method Subsequent measurement value of remaining lease payments using the using the discount rate determined at lease commencement (2) and reduce the lease liability by the – lease liability discount rate determined at lease commencement (2) payments made Measure the ROU asset at the amount of remeasured lease liability, adjusted for the Amortize the ROU asset, generally on a straight-line remaining balance of any lease incentives Subsequent measurement basis, over the shorter of the lease term or the useful received, any cumulative prepaid or accrued – ROU asset life of the ROU asset, and record any impairment of rents (i.e., uneven rent payments), any the ROU asset unamortized IDCs and any impairment of the ROU asset Income statement effect Generally straight-line expense Generally “front - loaded” expense (1) Initial measurement of the ROU asset also includes the lessee’s IDCs and prepayments made to the lessor at or before the commencement date, less lease incentives received from the lessor (2) As long as the discount rate has not been updated as a result of a reassessment event 7
Overview Lessee Accounting – Short-term Leases Lessees can make an accounting policy election, by class of underlying asset to ▪ which the right of use relates, to use the short-term lease exception. Applies to leases with a lease term of 12 months or less that do not include an ▪ option to purchase the underlying asset that the lessee is reasonably certain to exercise Election can only be made at the commencement date ▪ Lessees do not recognize an ROU asset or lease liability for qualifying leases ▪ and recognize lease payments as an expense on a straight-line basis Exception is not available for lessors ▪ 8
Overview Lessee Accounting – Presentation Balance sheet ROU asset Lease liability Present either separately or Present either separately or ▪ ▪ together with other assets together with other liabilities (e.g., owned assets) If presented together with other ▪ If presented together with other liabilities, disclose the line items ▪ assets, disclose line items that that include lease liabilities and include ROU assets and their their amounts amounts Finance lease liabilities must be ▪ Finance lease ROU assets must be presented separately from ▪ presented separately from operating lease liabilities operating lease ROU assets Subject to current and noncurrent ▪ Subject to same classification as classification, similar to other ▪ other nonfinancial assets financial liabilities 9
Overview Disclosure Disclosure objective – to enable financial statement users to assess the amount, ▪ timing and uncertainty of cash flows arising from leases New disclosures for lessees and lessors include: ▪ Significant assumptions and judgments made ▪ Maturity analyses of lease liabilities (for lessees) or lease receivables (for ▪ lessors), separately by lease type, as of the reporting date, including a reconciliation of undiscounted cash flows to the lease liabilities or receivables New disclosures for lessees include: ▪ Separate quantitative disclosure of lease cost, by type (e.g., finance lease, ▪ operating lease, short-term lease) Weighted-average remaining lease term, separately by lease type ▪ Weighted-average discount rate, separately by lease type ▪ 10
Implementation considerations Key Questions Financial impacts: • What types of leases exist? • What types of contracts do we have that could be affected by the revised definition of a lease? • Have we considered how we will need to change our existing processes to address the new accounting requirements? • Have we determined whether we have the information we will need to comply with the new disclosure requirements? • How will the new guidance affect our financial statements? How will our performance metrics be affected? Transition impacts: • How long will the transition take, and when should we start? • What resources and budget are required? • What other internal projects overlap? • Does our organization have a plan to elect the available transition practical expedients? Organizational and system impacts: • Does this affect the structure of our lease contracts? • Will we need to reconfigure our enterprise resource planning systems to generate lease right-of-use assets and liabilities, revenue, lease expense and other journal entries, including those required for transition? • Do we have the ability to accurately capture the arrangements and required data points, or do we need to change our systems? • How do our company’s implementation plans benchmark against our competitors? • How and when will we communicate to internal and external stakeholders? 11
12
Thank You! MODERATOR PRESENTER PRESENTER Jesus Socorro, CPA Emma Florea, CPA Trevor Foo Managing Principal Director Director Risk & Transaction Advisory Risk & Transaction Advisory Risk & Transaction Advisory jsocorro@mbafcpa.com eflorea@mbafcpa.com tfoo@mbafcpa.com (212) 931-9167 direct (212) 931-9114 direct (786) 709-9228 direct 13
Stay a Step Ahead You don’t have to be an expert – that’s our job. MBAFCPA.COM Miami l New York City l Baltimore l Boca Raton l Boulder l Coral Gables Fort Lauderdale l Las Vegas l Naples l Orlando l Palm Beach l Valhalla l India 14
Recommend
More recommend
