navigating the new lease accounting standards for audit...
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Navigating the New Lease Accounting
Standards for Audit Advisers Preparing Clients for the Transition to the Joint Project Lease Reporting
TUESDAY, JANUARY 12, 2016, 1:00-2:50 pm Eastern
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FOR LIVE EVENT ONLY
January 12, 2016
Navigating the New Lease Accounting Standards for Audit Advisers
Derek Anderson, Managing Director
VisualLease
Chris Rouse, Director
Windham Brannon
Notice
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any tax opinions, memoranda, or other tax analyses contained in those materials.
The information contained herein is of a general nature and based on authorities that are
subject to change. Applicability of the information to specific situations should be
determined through consultation with your tax adviser.
FASB/IASB Changes Overview
By Derek Anderson, MCR
A BRIEF HISTORY
• 2006 – FASB and IASB launch project
• 2010 – First exposure draft released
• 2013 – Second exposure draft released
• Q1 2016 – New standard is published
• 2018 / 2019 – New standard will go into effect
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Lease Defined
“a contract, or part of a contract, that conveys the
right to control the use an identified asset (the
underlying asset) for a period of time in exchange for
consideration.”
Exemptions –
• Low value assets
• Leases with a term less than 1 year
7
FASB/IASB Overview
• FASB and IASB standards differ
• IASB = All leases are Type A (Capital)
• FASB = Allows for Type A and B (Operating)
• Requires leasees to record all leases as both
Assets and Liabilities on the Balance Sheet.
Includes both real estate and equipment leases.
• To be released Q1 2016 with implementation by
2018/2019. Requires a restatement of all leases
retrospectively going back three years.
8
FASB Type A v. Type B
1. The lease automatically transfers ownership of the
property to the lessee by the end of the lease.
1. The lease contains a bargain purchase option.
1. The lease term equals 75% or more of the
estimated economic life of the property.
2. The present value of the minimum lease payments
at the beginning of the lease term equals or
exceeds 90% of the fair market value of the
property.
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IASB
All leases are Type A Capital Leases.
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Options
• Options - An entity should include such an option in
the lease term only if it is reasonably certain that the
lessee will exercise the option having considered
the relevant economic factors as with US GAAP.
• Reassessment - reassess the lease term only upon
the occurrence of a significant event or a significant
change in circumstances that are within the control
of the lessee.
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Variable Payments
• Measurement - The Boards decided that only variable
lease payments that depend on an index or a rate
should be included in the initial measurement of lease
assets and lease liabilities and that an entity should
measure those payments using the index or rate at
lease commencement.
• Reassessment – FASB/IASB remeasures if the lease
liability changes for other reasons. IASB also
remeasures when there is a change in the cash flows
resulting from a change in the reference index or rate.
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Right of Use (ROU) Presentation
• FASB - Present finance ROU assets and operating
ROU assets as separate line items or note which
line items in the balance sheet include finance ROU
assets and operating ROU assets. A lessee is
prohibited from presenting finance ROU assets
within the same line item as operating ROU assets.
• IASB - Present as a separate line item on the
balance sheet or disclose in the notes as ROU
assets.
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Liability Presentation
• FASB - Present finance lease liabilities and
operating lease liabilities as separate line items or
note which line items in the balance sheet include
lease liabilities and operating lease liabilities. A
lessee is prohibited from presenting finance lease
liabilities within the same line item as operating
lease liabilities.
• IASB - Present as a separate line item on the
balance sheet or disclose in the notes as lease
liabilities.
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Cashflow Presentation
• Cash payments for the principal portion of the lease
liability arising from finance leases within financing
activities.
• Cash payments for the Interest portion of the lease
liability arising from finance leases within operating
activities.
• Cash payments arising from operating leases within
operating activities. (FASB Only)
15
Example of Calculations
16
When does it go into effect?
• Companies reporting to the SEC - December 15,
2018, including interim periods within those fiscal
years.
• For all other entities - December 15, 2019, and
interim periods within fiscal years beginning after
December 15, 2020.
17
19
Leases - Evaluating and responding to risks
Presented by
Chris Rouse Windham Brannon, PC
Leases - Evaluating and responding to risks
20
Agenda Evaluating and responding to risks of material misstatement related to lease recognition, measurement and presentation
Leases - Evaluating and responding to risks
21
Relevant Objectives • Existence • Completeness • Valuation • Accuracy • Cutoff • Rights and Obligations • Disclosure • Special considerations
Leases - Evaluating and responding to risks
22
Relevant Objectives • Existence of recorded leases
o Obtain and extract contract terms o Consider confirmation No side agreements Any amendments, extensions, etc Clarification of vague matters relevant to
accounting
Leases - Evaluating and responding to risks
23
Relevant Objectives • Completeness
o Inquire, and believe but verify o Comparison of observation of property and
equipment to list(s) of owned property and equipment
o Review expense accounts likely to include leased items for recurring level payments
o Review legal filings in local jurisdiction(s)
Leases - Evaluating and responding to risks
24
Relevant Objectives • Valuation and accuracy
o Term Non-cancellable period Renewals “Significant economic incentive” judgments “Reasonably certain” criteria is a “high” standard
o Amount Payments
• Variable payments • Contingent payments
Discount rate • Implicit in lease vs entity incremental rate vs risk-
free rate
Leases - Evaluating and responding to risks
25
Relevant Objectives • Valuation and accuracy (continued)
o Classification as A or B lease “A” leases are personal property
• Separately recognize amortization and interest General ledger accounts should separate
“B” leases are land and buildings (or part of building) • Recognize single lease cost
General ledger accounts will still have to be separate because of cash flow and disclosures
o Lease modifications Consider changes in payment rates, review of
correspondence files, etc • Accounting department may not know about
modifications
Leases - Evaluating and responding to risks
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Relevant Objectives • Cutoff
o Subsequent events should consider effective date of new leases Consider disclosure of material new leases
o Review of new leases for prior year effective dates Restatement issue
Leases - Evaluating and responding to risks
27
Relevant Objectives • Rights and Obligations
o See also Existence and Accuracy o The amount of the “Obligation” establishes the
amount of the “Right” o Extract agreements for disclosure
Leases - Evaluating and responding to risks
28
Relevant Objectives • Disclosure
o Use a GREAT disclosure checklist Set up a PBC template that captures all the
information required to make the disclosures o Disclosure of undiscounted maturities will require
spreadsheets o Disclosure of service elements may be contractual or
general practice Also requires disclosure of future commitments
for services
Leases - Evaluating and responding to risks
29
Relevant Objectives • Special considerations
o Related party leases No carve-out or differential measurement or
disclosure o Materiality Consider user needs Is information “decision useful”
o EBIDAT Key measure for creditors Consider disclosures that facilitate users
determining EBIDAT
Leases - Evaluating and responding to risks
30
In conclusion …
Bon Auditpetite!
Questions?
Contact
Chris Rouse [email protected] 404-898-2000
FASB/IASB Example
By Derek Anderson, MCR
Example – Facts = Type A
*Example published by PWC @ https://www.pwc.com/us/en/asset-management/real-estate/assets/pwc-corporate-real-estate-lease-accounting-change.pdf
32
Example – ROU and Liability
33
Example - Interest
34
Example - Amortization
35
Example – Type B
36
Example - Amortization
37
39
Leases – Preparing your clients
Presented by
Chris Rouse Windham Brannon, PC
Leases – Preparing your clients
40
Preparing Your Clients for the New Lease Standard • Identify users of the financial statements
o Investors, banks, creditors o Consider meeting with users to discuss the new
Standard • Identify what’s important to users
o Balance sheet o Income statement o Cash flow/EBIDAT o Disclosure vs. measurement Especially informal related party leases
o GAAP departure effect
Leases – Preparing your clients
41
Preparing Your Clients for the New Lease Standard • Income tax considerations
o Possible change in accounting method o Lease market terms will change before effective date
to meet demand, which may trigger different tax effects
• Compensation considerations o Bonuses, retirement plan contributions, etc
• New leases before effective date o Terms can be altered in the context of market and
competitive considerations to control impact on financial statements
Leases – Preparing your clients
42
Preparing Your Clients for the New Lease Standard • Loan covenants
o Existing loans that mature beyond effective date Changes on effective date could blow loan
covenant compliance Recognition of additional liabilities could
adversely affect lending relationship o Loan renewals before effective dates Include provisions regarding effects of the
application of new accounting standards not affecting loan covenant compliance
Leases – Preparing your clients
43
Preparing Your Clients for the New Lease Standard • Educate clients regarding “Expecting” vs. “Knowing”
o Lease terms o Interest rate implicit in the lease o Related party leases especially
• Determine the need for new general ledger accounts o Lease assets in types and classes o Lease liabilities current and long term o Income statement amortization accounts o Cash flow break-outs o Disclosures too
Leases – Preparing your clients
44
Preparing Your Clients for the New Lease Standard • Discuss accounting assistance that may be provided
o Estimates o Calculations o Amortization tables
• Pro forma financial statements o Model the effects of new lease standard on the
client’s financial statements o Consider disclosure of “pending accounting
pronouncements” in current financial statements
Leases – Preparing your clients
45
Preparing Your Clients for the New Lease Standard • In current financial statements, include sufficient
information about leases so that when the information migrates to the balance sheet, etc the users are not surprised o Lease periods and renewal provisions and
expectations o Lease rates and future expectations
Leases – Preparing your clients
46
In conclusion …
Bon Auditpetite!
Questions?
Contact
Chris Rouse [email protected] 404-898-2000