body copy… leases...slide header body copy… • lease term reassessment example: • on june 1,...
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LEASES Presented by:
Brad EberhardEric Linneman
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Body copy…PRESENTERS
BRAD EBERHARDManager
ERIC LINNEMANManager
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LEARNING OBJECTIVE
• Gain an understanding of Financial Accounting Standards Board Accounting Standards Update No. 2016-02 –Leases (Topic 842) and how it differs from prior authoritative guidance
• Recognize how this may impact your organization
• Preparing to implement the new standards within your organization
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QUICK DETAILS
• ASU 2016-2 was issued in February 2016• ASC 842 Leases – replaces ASC 840• Revision was developed over several years and
included input obtained from:• workshops, meetings with users and preparers of
financial statements, and exposure drafts• Non-public companies need to implement for FY
beginning after 12/15/2019
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WHY FIX SOMETHING THAT IS NOT BROKEN:
• Leasing is often a major part of an entity’s organization
• Users need a complete understanding of an entity’s activity
• Incomplete disclosure of all lease activity
• Economically similar, however, treated differently
• Off Balance Sheet liabilities
• Differences with International Standards
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WHY FIX SOMETHING THAT IS NOT BROKEN: (CONT.)
• Issues with current standard
• Operating Leases are the largest issue
• Differences with International Standards
• Activities can be structured to achieve a particular accounting
result
• Items not changing
• Economics of leases can be different – so distinction between
financing and operating leases are not changing.
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WHAT IS THE POINT?
• Moves from determining whether to record a lease
• Operating vs. Capital
• Critical determination is now whether a contract is or
contains a lease – all leases are required to be reported.
• Leases vs. Service Agreements
• When are the services performed?
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ARE WE ALIGNED WITH IFRS?
• IFRS – only financing leases
• IFRSs provides an exemption for assets less than $5,000
• Various other differences exist
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ASC 840 – CURRENT GAAP
• Current standard (as amended) from 1976 • Capital Lease vs. Operating Lease• Four-part test – Bright – line test vs. substance of
transaction• Conveys ownership at the end• Bargain purchase option at the end• 75% or more of the economic useful life• PV of rents is 90% or more of FMV
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ASC 840 – FINANCIAL STATEMENT PRESENTATION
• Capital Lease• Equipment• Capital Lease Obligation• Depreciation Expense• Interest Expense
• Operating Lease• Rent Expense
No balance sheet effect (unless escalating rent)
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ASC 840 – DISCLOSURES
• Capital Lease• Equipment Cost• Depreciation Expense• Accumulated Depreciation• Future Minimum Lease Payments (5 Years)• Imputed Interest
• Operating Lease• Future Minimum Lease Payments (5 Years)
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OTHER ISSUES:
• What is not included • Intangible assets, biological
assets, mineral exploration, inventory, assets under construction
• Issues the FASB needed to consider:• Inception vs. Commencement• Cost-effective implementation
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ASU 2016-02 – KEY CONSIDERATIONS
• Lease determination• Lease/non-lease
components• Lease consideration• Lease classification• Reporting of leases• Lease modifications• Lessor accounting• Implementation guidance
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ASU 2016-02 – DETERMINE A LEASE
• Prior focus was on capital vs. operating
• Since an asset/liability is created, focus now moves to determination if a contract contains a lease
• Inception date vs. commencement date
• Lease = the right to control the use of an identified asset for a period of time in exchange for consideration
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ASU 2016-02 – DETERMINE A LEASE (cont.)
• Identifiable asset:• Must be explicitly identified• Must be distinct• Substitution rights
• Throughout the period of use, consider whether you have:• The right to substantially all of the economic benefits• The right to direct the use of the identified asset
• Reconsider only when terms of the contract change.
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ASU 2016-02 – LEASE COMPONENTS
• Important to consider since an asset and liability are being recorded
• A component must transfer a good or service
• Identify separate lease components
• Must provide the right to the use of an asset
• Non-lease components – i.e. maintenance
• Allocation of lease consideration
• Relative to stand-alone prices of each component
• Practical expedient – accounting policy election
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ASU 2016-02 – LEASE CONSIDERATION
• Fixed payments
• Variable payments
• Index linked payments
• Fees paid by the lessee
• Exercise price options
• Payment of penalties
• Lessees only – amounts probably
to be paid for residual guarantees
• Reconsider only if a contract
modification
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ASU 2016-02 – LEASE CLASSIFICATION
• On the lease commencement date, must determine the
classification:
• Financing Lease (aka Capital Lease)• Transfer of ownership• Option to purchase• Term is for “major part” of the economic life• Lease payments + residual value >/= the fair value• Asset would have no alternative use at lease end
• Operating Lease
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Body copy…• Leases less than 12 months are excluded (accounting policy
election)
• Eliminated bright-line tests
• (i.e. transfer of ownership, BPO, 75%, 90%)
ASU 2016-02 – LEASE CLASSIFICATION(Cont.)
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Body copy…• On the lease commencement date, must determine the lease term:
• Non-cancelable period with right to use and• Optional periods for which it is reasonably certain the option will be
exercised
• Reassessment of lease term:
o Required to reassess if
1. Significant change in circumstances,
2. Specific term changes, or
3. Election to exercise option or terminate which was previously determined to be
uncertain
ASU 2016-02 – LEASE CLASSIFICATION(Cont.)
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Body copy…• Lease term reassessment example:
• On June 1, 20X1, ABC Company leased a warehouse for a 10-year term with two 5-year renewal options. On this date, ABC was not reasonably certain that it would exercise the options. The term is 10 years.
• On June 1, 20X6, ABC installed leasehold improvements with a 10-year useful life. ABC reassessed the warehouse lease and they are now reasonably certain they will exercise the first of two renewal options.
Reassessment is needed as a result of management being reasonably certain of a change in the length of lease.
ASU 2016-02 – LEASE CLASSIFICATION(Cont.)
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Body copy…• Lease term reassessment example:
• On June 1, 20X1, ABC Company leased a warehouse for a 10-year term with $200,000 due on June 1st and to be adjusted by the change in CPI annually. ABC records a lease liability, a “Right-of-use” asset and prepaid rent.
• On June 1, 20X2, ABC determined the CPI adjustment to be 12.5% ((126-112)/112) resulting in a new lease payment of $112,500 ($100,000 fixed + $12,500 variable).
No assessment is needed because the change in CPI is a variable lease payment.
ASU 2016-02 – LEASE CLASSIFICATION(Cont.)
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ASU 2016-02 – REPORTING OF LEASES BALANCE SHEET
• Net Present Value of the Lease
Liability• What it includes• Discount rate
• Right of use asset – initial• Financing• Capital
• Right of use asset – subsequent• Financing• Capital
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ASU 2016-02 – REPORTING OF LEASES COMPREHENSIVE
STATEMENT OF INCOME
• Financing lease
• Amortization
• Interest expense
• Right of use asset
• Single cost over the term of the lease
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ASU 2016-02 – REPORTING OF LEASES CASH FLOW
• Financing lease
• Operating – interest
• Financing – liability
• Right of use asset
• Operating
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ASU 2016-02 – REPORTING OF LEASES DISCLOSURES
• Qualitative• Nature of leases – terms and conditions of variable lease
payments, options to extend or terminate and residual value• Future leases not yet commenced• Significant assumptions• Terms and conditions of sale and lease back transactions• Accounting policy elections
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ASU 2016-02 – REPORTING OF LEASES DISCLOSURES
• Quantitative• Lease cost – finance vs. operating• Short term lease expense• Variable lease expense• Sublease income• Net gain or loss recognized from sale and leaseback transactions• Amounts segregated between finance and operating leases for
cash paid, supplemental cash flow, weighted-average remaining lease term and weighted-average discount rate
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ASU 2016-02 – REPORTING OF LEASES MODIFCATION
• Significant changes
require a recalculation
• Separate lease or
modified lease
• Lease re-measurement
• What is impacted
• Lease termination
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ASU 2016-02 – LESSOR ACCOUNTING
• No significant changes• Aligns with 606 – Revenue Standard
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• Public (and certain others): Fiscal years beginning after December 15, 2018, including interim periods within those years
• Others: Fiscal years beginning after December 15, 2019 and interim periods after December 15, 2020.
• Early adoption is permitted for all entities.
ASU 2016-02 –IMPLEMENATION GUIDANCE
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Two transition methods:
• Retrospectively to each prior reporting period presented (must adjust equity and all other comparative amounts)
• Retrospectively at the beginning of the period of adoption through a cumulative effect adjustment
ASU 2016-02 –IMPLEMENATION GUIDANCE
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Body copy…Practical expedients –
No need to reassess expired or existing contractsNo need to reassess existing classificationsNo need to reassess initial direct costs Hindsight in lease term
ASU 2016-02 –IMPLEMENATION GUIDANCE
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Body copy…New presentation
Lease disclosure and right to use of an asset
ASU 2016-02 –IMPLEMENATION GUIDANCE
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Body copy…May affect compliance with contractual agreements & loan covenants
Most impacted sectors –Drugstore & retail chains, telecommunications, restaurant chains, airlines, banks, grocery stores
ASU 2016-02 – IMPACT
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Body copy…Identifying an asset
• Supplier enters into a contract to provide a specific hood ornament for a car.
• Supplier designs and custom builds a die to specifically produce the hood ornament and customer is involved in the design.
• Does the contract identify an asset to be used?
EXAMPLES
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Body copy… Control of an asset• Sports Jets enters into a contract with Supplier Corp
for airplane transportation for a three-year period.• Sports Jets provides dates of travel and arrival and
departure locations one week in advance. • Supplier provides the airplane, crew and pilot. • Who controls the use of the identified asset?• What are the non-lease components and service
contracts?
EXAMPLES
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Body copy…Components of a lease
• Office Express rents an office building from Landlord for 15 years. The office is fully furnished and has a newly installed custom made HVAC system. Landlord performs all common area maintenance. Office Express makes one monthly rental payment.
• What are the components of the lease?
EXAMPLES
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Body copy…Variable payments – tied to Sales
• Clothes Express enters into a 10-year lease for retail space with Lessor.
• Annual lease is $22,000 plus 5% of Clothes Express sales.
• What are the lease payments?
EXAMPLES
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Body copy… Variable payments • Clothes Express enters into a 10-year lease for retail
space with Lessor. • Annual lease is $22,000. Rents increase by the greater
of 1% of Clothes Express sales or 3% of the previous rental rate each anniversary date of the lease.
• What are the lease payments?
EXAMPLES
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QUESTIONS?
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Body copy…CONTACT US WITH ADDITIONAL QUESTIONS
BRAD EBERHARDManager
ERIC LINNEMANManager