2016 a&e update_leases and new standards - hubbard - proofed by bs
TRANSCRIPT
Leases – A Practical Matter
Justin Hubbard, CPA, CGMAAssociate Director of Assurance
Services
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“One of my main goals in life is to one day fly on an airplane that actually appears on the balance sheet of an airline.”
~Quote by Sir David Tweedie, former IASB chair
Leases
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Leases
ASU No. 2016-02, Leases (Topic 842) Effective:
12/15/18 – Public 12/15/19 - Private
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Leases All leases on balance sheet
Capital Lease = Financing Lease Operating Lease = Operating Lease
$1.25 TRILLION
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Leases
Lease
Liability
Present value of
lease payments over lease
term
CREDIT
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Leases
DEBIT
ROU Asset
Lease liability
Direct costs
Less incentives received
Advance
payments
ROU = Right of use
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Leases
Lessee accounting
Right-of-use asset Lease liability
Single lease expense on a straight-line basis
Cash paid for lease payments
Right-of-use asset Lease liability
Amortization expense Interest expense
Cash paid for principal and interest payments
Finance Lease
Operating
Lease
Balance Sheet
Income Statement Cash Flow Statement
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Example Company J leases machine from
Company M. 3 annual payments as follows: 3.74%
Year Amount1 $100,0002 $350,0003 $200,000
Total $650,000
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Example Current Accounting
Operating lease – Expense based on outflows
Capital lease – Asset of $600,000 Liability of $600,000 Interest expense over 3 years = $50,000 Depreciation expense over 3 years =
$600,000
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Example
Under ASU 2016-02
Lease expense = the sum of lease payments / termAdjustments to ROU Asset = diff between lease expense and interest expense
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Example – AJE’s
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Leases
Disclosures: A lessee shall disclose all of the
following: Description of leases Basis, terms and conditions of any
variable payments Options to extend Residual value guarantees Covenants Maturity analysis
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Leases Disclosures:
A lessor shall disclose all of the following: Description of leases Basis, terms and conditions of any variable
payments Options to extend Option to purchase Significant assumptions in determining
existence of lease Allocation between lease and nonlease
components
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Implications
Key Metrics and Debt CovenantsMetric EffectCurrent Ratio – Current Assets/Current Liabilities
Decrease
Leverage Ratio – Debt/Equity IncreaseReturn on Assets – Net income/Assets
Decrease
Debt to EBITDA – Debt/EBITDA Increase
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Implications
Key Metrics and Debt CovenantsCovenant EffectNew debt capacity DecreaseCapital expenditure capacity DecreaseEBITDA Varies
EBITDA – add back amortization and interest expense (financing lease)
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ImplementationEngage Stakeholders• Discuss financial impact• Agree on end result• Tax, vendors, legal, IT,
policies
Create Plan• Departmental ownership• ID key steps / milestones• IT
Data• Organize agreements• Complete population
Analyze• Establish templates• IT automation• Prepare JE’s• Proforma FS
Execute•Record entries•Finalize policies
Re-Evaluate
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Benefits Visibility to all leases
Ability to ID waste Cost optimization
Leverage volume of leases for improved terms
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Obstacles
Locating the lease agreements
Collecting necessary data on all organizational leases in a centralized, electronic inventory could be a huge obstacle.
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Obstacles
Outdated leasing systems
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Tools
Software / Vendors Document abstraction software iLeasePro Lease Accelerator
Dean Dorton Lease database Ongoing analysis Sync with tax and financial goals
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Obstacles
More than just an “accounting change”
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Impact
Lease vs. buy
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Resources
AICPA Financial Reporting Center Home > Interest Areas > Financial Reporting
Center > Accounting and Financial Reporting > Leases
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“(Help) Wanted: For hazardous journey. Small wages, bitter cold, long months of complete darkness, constant danger, safe return doubtful. Honour and recognition in case of success.”
Earnest Shackleton – polar explorer, early 20th century
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To further complicate matters..
New Stuff!!Year # of ASUs2016 17 through
October2015 172014 182013 12
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Recent Standards
Consolidation: Interests Held through Related Parties that are under Common Control•FY After 12/15/16 (public), 2017 (private)
2016-17
Accounting for Income Taxes: Intra-Entity Asset Transfers•FY After 12/15/17 (public), 2018 (private)
2016-16
Statement of Cash Flows: Classification of Certain Cash Receipts and Cash Payments•FY After 12/15/17 (public), 2018 (private)
2016-15
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Recent Standards
Financial Statements of Not-For-Profits•FY After 12/15/17
2016-14
Accounting for Financial Instruments – Credit Losses•FY After 12/15/19 (public), 2020 (private)
2016-13
Employee Share-Based Payment Accounting Improvements•FY after 12/15/16 (public), 2017 (private)
2016-09
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Recent Standards
Simplifying the Transition to the Equity Method of Accounting•FY after 12/15/16
2016-07
Contingent Put and Call Options in Debt Instruments•FY After 12/15/16 (public), 2017 (private)
2016-06
Effect of Derivative Contract Novations on Existing Hedge Accounting Relationships•FY After 12/15/16 (public), 2017 (private)
2016-05
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Recent StandardsRecognition of Breakage for Prepaid Stored-Value Products•FY After 12/15/17 (public), 2018 (private)
2016-04
Goodwill/Business Combinations/Consolidation/Derivatives & Hedging• Effective immediately
2016-03
Accounting for Financial Instruments – Classification and Measurement•FY After 12/15/17 (public), 2018 (private)
2016-01
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Revenue Standard (606) Updates
2016-12 – Narrow Scope Improvements
•Collectability•Sales Taxes•Contracts at time of transition
2016-10 – Identifying performance obligations
• Clarifies contractual provisions requiring an entity to transfer control• “Promise” to transfer goods
2016-08 – Principal vs. Agent
Considerations•Clarifies determination of principal vsagent
•Clarifies determination of goods/services
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Emerging Issues Continued “Simplification” Emphasis on Fair Value Disclosure Framework Project
