accounting changes snapshot presented by shawn halladay managing director the alta group march 23,...
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Accounting Changes Snapshot
Presented by
Shawn Halladay
Managing Director
The Alta Group
March 23, 2012
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Topics
The current environment What is changing? Market impact Engaging the customer Lessor concerns
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The Current Environment
FAS 13 bifurcation of products
o Operating lease (off balance sheet)
o Capital lease (asset and liability)
o Bright line tests/straightforward
Off balance sheet benefits
o Financial statements/ratios
o Simplicity
o Level of decision-maker
o Affordability
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What is Changing?
ED product FAS 13 product
Not retained Operating lease
Right-of-use lease Capital lease
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What is Changing?
All leases are capitalized (lessee)
o Asset and liability on balance sheet
o Amortization and interest expense
Lessor and vendor accounting models are modified
o Receivable and residual approach
o Sales-type leases affected
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Market Impact
•Lessor consequences and responses
•Lessor accounting requirements
Proposed accounting
changesLessee impact
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Market Impact
Loss of off balance sheet financing
o Ratios and performance metrics
o Timing of expense
Additional effort
o Tracking assets and liabilities
Market shifts
o Decision process
o Transition
o Let the hunt begin!
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Engaging the Customer
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Engaging the Customer
Proactive approach
o Address concerns
o Share perspective
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Engaging the Customer
Needs focus
o Cash flow
o Asset utilization
o Financial factors
o Tax concerns
Customer feedback
Customer resources
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Lessor Concerns
?????
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Receivable & residual approach
Lease receivable for right to receive lease payments
Allocate book value of asset between leased portion and retained (residual) portion
Asset BV x Lease receivable/FV of Asset = Derecognition Amount
Profit = Lease receivable – Derecognition Amount
Residual is accreted
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Example A lessor manufactures a machine for $7,500 and enters into a 3-
year lease with annual payments due at the end of the year of $2,400. The machine’s fair value is $10,000 at lease commencement with an estimated residual value at the end of the three years of $4,770. The implicit lease rate is 7.9%, and the present value of the lease payments is $6,200.
Asset BV x lease receivable/FV of asset = derecognition amount
$7,500 x $6,200/$10,000 = $4,650 (derecognition amount)
$7,500 - $4,650 = $2,850 (allocated residual amount)
Lease receivable – derecognition amount = profit at commencement
$6,200 - $4,650 = $1,550 (profit at commencement)
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Practice Issues
Loan with balloon
Sales-type lease
Receivable and residual
Receivable $ 6,200 $ 6,200 $ 6,200
Balloon/residual $ 3,800 $ 3,800 $ 2,850
Net investment $ 10,000 $ 10,000 $ 9,050
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Practice Issues
Loan with balloon
Sales-type lease
Receivable and residual
Finance income $ 1,970 $ 1,970 $ 1,727
Sales profit $ 2,500 $ 2,500 $ 2,743
Net investment $ 4,470 $ 4,470 $ 4,470
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Operational Implications
Residual assets
Revenue recognition
Impairment
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Operational Implications
Modifications
Renewals/payoffs
Lessee data requests
Management reporting
Disclosure requirements
Processes, procedures, and internal controls
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System Issues
Front-end integration
Different information requirements
Different calculations
Multiple net investment links
New output
Scalability
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Product Inventory
Standard economic products
Funding products
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Implementation – Planning
Project team and definition
Timeline
Systemic impact assessments
Strategic modeling
Get to work
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Micro Frame of Reference
Intermediate impact assessments
Business interpretation of changes/needs
Internal and external stakeholder buy-in
Organizational integration
Resources
Current and near-term budgets
Transition
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Micro Frame of Reference
System impact assessment
Change analysis
Front-end versus back-end
Vendor readiness
Application hurdles
Process versus output changes
Scope resolution
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Micro Frame of Reference
o Cutover
o Parallel/dual
o Transition
o Classification
o Mapping
o Rebooking/conversion
o Restatement
Approach
Tool availability
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Implementation – Transition
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Simple versus total retrospective
Product identification
Classification difficulties
Mapping
Prior data capture
Fair value assessments
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Implementation – Planning
Project team and definition
Timeline
Systemic impact assessments
Strategic modeling
Get to work
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Conclusion
Questions and answers