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CBIZ & MHM Executive Education Series™

Leasing Unleashed: A Deep Dive into the New Standard (Topic 842) Hal Hunt & Heather Winiarski April 5 & April 19, 2016

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About Us

• Together, CBIZ & MHM are a Top Ten accounting provider • Offices in most major markets • Tax, audit and attest* and advisory services • Over 2,900 professionals nationwide

A member of Kreston International A global network of independent accounting firms

*MHM is an independent CPA firm providing audit, review and attest services, and works closely with CBIZ, a business consulting, tax and financial services provider.

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Before We Get Started…

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• If you have a question during the presentation, please use the Q&A feature at the bottom of your screen.

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CPE Credit

This webinar is eligible for CPE credit. To receive credit, you will need to answer periodic participation markers throughout the webinar. External participants will receive their CPE certificate via email immediately following the webinar.

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Disclaimer

The information in this Executive Education Series course is a brief summary and may not include all

the details relevant to your situation.

Please contact your service provider to further discuss the impact on your business.

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Presenters

Hal, is a Shareholder in the Kansas City office with more than 35 years of

experience in public accounting working with manufacturing,

distribution and other service-based companies. Hal is a member of the

firm's Professional Standards Group as subject matter expert on Leasing,

Business Combinations and Employee Benefit Plan Audit and Accounting

Matters. Hal also leads MHM’s Employee Benefit Plan Audit Practice.

816.945.5610 • hhunt@cbiz.com

HAL HUNT, CPA Shareholder

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Presenters

Heather serves as a Senior Manager in the Kansas City office. Her

responsibilities include supervising medium to large audit engagements,

and resolving critical audit and risk issues. Heather works with clients to

understand their organization, procedures and internal policies. She

plans, executes and directs external audits and is responsible for

managing and driving the success of multiple audit engagements.

Heather has expertise in lease accounting and specializes in the use of

computer-assisted audit tools and techniques (CAATTs) to analyze large

amounts of data and look for irregularities. Heather is a member of the

Audit Methodology Steering Committee.

816.945.5168 • hwiniarski@cbiz.com • @McWiniCPA

HEATHER WINIARSKI, CPA Senior Manager

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Agenda

Overview and Basic Concepts

02

01

03

04

Lease Classification

Lessee Accounting

Lessor Accounting

Other Lease Concepts

06

05

Transition and Next Steps

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OVERVIEW AND BASIC CONCEPTS

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Overview

• Key changes • Most leases will be recorded on the balance sheet • New presentation and disclosure requirements • Eliminated:

• Real estate-specific provisions • Leverage leases (prospectively)

• Alignment with Topic 606, Revenue from Contracts with Customers: • Sale and leaseback • Sales-type • Direct financing lease

• Similar concepts • Expense recognition for lessees • Classification criteria for operating vs. capital • Operating leases for lessors • Key definitions

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Definition of a Lease

• A contract contains a lease if it conveys the right to control the use of an identified asset (property, plant or equipment) for a period of time in exchange for consideration

• Control means the right to • Obtain substantially all of the economic benefits, and • Direct the use of the identified asset

• Customer can direct how and for what purpose the asset is used, or • Relevant decisions are predetermined and (1) customer was involved in the

design or (2) customer can operate the asset without the supplier having the right to change the operating instructions

• Identified assets can be • A portion of a larger asset if physically distinct • Explicitly-specified • Implicit

• Related party transactions are evaluated based on their legally enforceable terms and conditions

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What is Excluded?

• Leases of • Intangible assets • Exploration for or use of natural resources • Biological assets • Inventory • Assets under construction

• Short-term leases • Leases with a lease term of 12 months or less that do not have an

option to purchase the underlying asset that the lessee is reasonably certain to exercise

• Lessees can make a policy election (by class of underlying asset) not to recognize a lease asset or liability

• Contracts with a substantive right to substitute another asset

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Substantive Right of Substitution

• A right is substantive if • The supplier has the practical ability to substitute alternative

assets, and • The supplier would benefit economically from the substitution

• Factors to consider • Cost of substitution • Location of the asset • Restriction to substitute only on or after a particular date or event • Repairs and maintenance • Protective rights

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Example 1: Does this Contract Contain a Lease?

• A contract between Customer and a freight carrier (Supplier) provides Customer with the use of 10 specific rail cars of a particular type for 5 years.

• Customer determines when, where, and which goods are to be transported using the cars. When the cars are not in use, they are kept at Customer’s premises. Customer can use the cars for another purpose (for example, storage) if it so chooses. However, the contract specifies that Customer cannot transport particular types of cargo (for example, explosives).

• If a particular car needs to be serviced or repaired, Supplier is required to substitute a car of the same type. Otherwise, Supplier cannot retrieve the cars during the five-year period.

• The contract also requires Supplier to provide an engine and a driver when requested by Customer. Supplier keeps the engines at its premises and provides instructions to the driver detailing Customer’s requests to transport goods.

• Supplier can choose to use any one of a number of engines to fulfill each of Customer’s requests, as well as the goods of other customers (for example, if other customers require the transport of goods to destinations close to the destination requested by Customer and within a similar timeframe, Supplier can choose to attach up to 100 rail cars to a single engine).

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Example 1: Does this Contract Contain a Lease?

• Rail cars • Yes, the contract contains a lease of 10 rail cars for 5 years. • The rail cars are identified assets that are explicitly stated and can

only be substituted for needed servicing or repairs. • Customer has the right to obtain substantially all of the economic

benefits of the cars over the lease term. • Customer has the right to direct the use of the cars.

• Engine • No, the contract does not contain a lease of the

engine. • The engine is not an identified asset.

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Components of a Contract

• Components of a contract include only those items or activities that transfer a good or service to the lessee

• Lease and nonlease components should be separated • For lessees, consideration is allocated based on a relative

standalone price basis • For lessors, consideration is allocated based on Topic 606

• Nonlease components should be separately accounted for under other applicable GAAP (generally accepted accounting principles) • Lessees may make an accounting policy election (by class of

underlying asset) to account for each lease component and its related nonlease components as a single lease component

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Components of a Contract

• The right to use an underlying asset should be a considered a separate lease component (from other lease components) if • The lessee can benefit from the right of use either on its own or

together with other resources that are readily available, and • The right of use is neither highly dependent on nor highly interrelated

with the other right(s) to use underlying assets in the contract

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Lease Term and Related Payments

• Lease term • Noncancellable period plus optional periods in which it is reasonably

certain that the lessee will exercise the option or that the lessor controls whether the option will be exercised

• Lease payments • Fixed payments, including in-substance fixed payments, less incentives

paid • Variable lease payments dependent upon an index or rate

• Other variable lease payments are recognized in the period they incur • If the lease term includes the lessee exercising these options:

• Exercise price of an option to purchase the underlying asset • Payments for penalties to terminate the lease

• Fees paid by the lessee to owners of a special purpose entity for structuring the transaction

• For lessees only, amounts probable of being owed under residual value guarantees

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Initial Direct Costs and Discount Rate

• Initial direct costs are incremental costs that would not have been incurred if the lease had not been executed

• Discount rate is the rate implicit in the lease • If the rate implicit in the lease cannot be readily determined, then lessees

can use the incremental borrowing rate (borrowing a similar amount for a fixed rate for the same term with similar collateral)

• Nonpublic lessees can make an accounting policy election (for all leases) to use a risk-free discount rate

• The rate implicit in the lease causes the aggregate present value of the sum of • The lease payments and • The amount the lessor expects to derive from the underlying asset following

the end of the lease term To equal the sum of • The fair value of the underlying asset at lease commencement (less any tax

credit retained and expected to be realized by the lessor) and • Any deferred initial direct costs (excluded for sales-type leases with selling

profit or loss)

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LEASE CLASSIFICATION

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Lease Classification Criteria

1. The lease transfers ownership of the underlying asset to the lessee by the end of the lease term.

2. The lease grants the lessee an option to purchase the underlying asset that the lessee is reasonably certain to exercise.

3. The lease term is for the major part of the remaining economic life of the underlying asset. • However, if the commencement date falls at or near the end of the

economic life of the underlying asset, this criterion shall not be used for purposes of classifying the lease.

4. 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.

5. 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.

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Which Type of Lease Do I Have?

Lessee • Finance = At least one of the five criteria is met • Operating = None of the five criteria are met Lessor • Sales-type = At least one of the five criteria is met • Direct financing = None of the five criteria are met, and

• The present value of the sum of the lease payments and any residual value guaranteed by the lessee and/or any other third party unrelated to the lessor equals or exceeds substantially all of the fair value of the underlying asset, and

• It is probable that the lessor will collect the lease payments plus any amount necessary to satisfy a residual value guarantee.

• Operating = Not a sales-type or direct financing lease

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LESSEE ACCOUNTING

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Example 2 - Fact Pattern

• Lessee enters into a 10-year lease of an asset, with an option to extend for an additional 5 years.

• Lease payments are $50,000 per year during the initial term and $55,000 per year during the optional period, all payable at the beginning of each year.

• Lessee incurs initial direct costs of $15,000.

• Lessee concludes that it is not reasonably certain to exercise the option to extend the lease (so the lease term is 10 years).

• The rate implicit in the lease is not readily determinable. Lessee’s incremental borrowing rate is 5.87%.

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Lessee - Finance Lease - Initial Measurement and Recognition

• The lease liability (LL) is initially measured at the present value of the lease payments not yet paid using the discount rate for the lease • LL at commencement = $342,017

(Present value 9 annual payments of $50,000 payments at a 5.87% discount rate)

• The right-of-use (ROU) asset equals the lease liability plus initial direct costs and prepayments to the lessor, less lease incentives received from the lessor • ROU at commencement = $407,017

($342,017 LL + $50,000 initial lease payment + $15,000 initial direct costs)

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Lessee - Finance Lease - Subsequent Measurement

• The LL is increased based on the interest method using the discount rate determined at lease commencement, unless a reassessment occurs, and reduced by the payments made • LL at end of Year 1 = $362,093

(Interest expense = $342,017 LL x 5.87% = $20,076) (End of period LL = $342,017 beginning of period LL + $20,076 interest expense - $0 lease payment)

• The ROU is amortized, generally on a straight line basis over the shorter of the lease term or useful life of the ROU asset, adjusted for any impairment loss recorded • ROU at end of Year 1 = $366,315

(Amortization expense = $407,017 initial ROU / 10 yrs = $40,702) (End of period ROU = $407,017 beginning of period ROU - $40,702 amortization expense)

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Lessee - Operating Lease - Initial Measurement and Recognition

• The lease liability (LL) is initially measured at the present value of the lease payments not yet paid using the discount rate for the lease • LL at commencement = $342,017

(Present value 9 annual payments of $50,000 payments at a 5.87% discount rate)

• The right-of-use (ROU) asset equals the lease liability plus initial direct costs and prepayments to the lessor, less lease incentives received from the lessor • ROU at commencement = $407,017

($342,017 LL + $50,000 initial lease payment + $15,000 initial direct costs)

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Lessee - Operating Lease - Subsequent Measurement

• The LL is measured at the present value of the lease payments not yet paid using the discount rate determined at lease commencement, unless a reassessment occurs • LL at end of Year 1 = $362,093

(End of period LL = Present value 8 annual payments of $50,000 payments at a 5.87% discount rate + $50,000 payment due at the beginning of year 2) (Lease expense allocated to LL = $362,093 end of period LL - $342,017 beginning of period LL = $20,076)

• The ROU is the amount of the LL and adjusted for cumulative prepaid or accrued lease payments, the remaining balance of lease incentives received (gross lease incentives received net of amounts previously recognized as part of the lease expense), unamortized initial direct costs and any impairment loss recorded • ROU at end of Year 1 = $375,593

(Total lease cost = $50,000 payments x 10 years = $500,000 + $15,000 initial direct costs = $515,000) (Lease expense = $515,000 total lease cost / 10 years = $51,500) (End of period ROU = $362,093 end of period LL + $13,500 remaining initial direct costs)

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Lessee - Comparison - Subsequent Measurement

Finance Operating

The LL is increased based on the interest method using the discount rate* and

reduced by the payments made.

The LL is measured at the present value of the lease payments not yet paid using

the discount rate*.

The ROU is amortized, generally on a straight line basis over the shorter of the lease term or useful life of the ROU asset,

adjusted for any impairment recorded.

The ROU is the LL adjusted for prepaid or accrued rent, the remaining balance of lease incentives received, unamortized initial direct costs and any impairment.

*Use the discount rate determined at lease commencement, unless a reassessment occurs

Finance Operating

End of Year 1 LL = $362,093 ($342,017 LL + $20,076 interest expense)

(Interest expense = $342,017 LL x 5.87% = $20,076)

End of Year 1 LL = $362,093 (Present value 8 annual payments of $50,000 payments at a 5.87% discount rate + $50,000)

End of Year 1 ROU = $366,315 ($407,017 ROU - $40,702 amortization expense)

(Amort expense = $407,017 ROU / 10 yrs = $40,702)

End of Year 1 ROU = $375,593 ($362,093 end of period LL + $13,500 remaining

initial direct costs)

Total Expense = $60,778 Total Expense = $51,500

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Lessee - Presentation - Statement of Financial Position

• Lessees should either present as separate line items or disclose in the notes the finance lease and operating lease right-of-use assets and the statement of financial position line items that include those assets. • Lessees are prohibited from presenting finance lease right-of-use

assets in the same line item as operating lease right-of-use assets. • The same requirements apply to the presentation of the lease

liabilities.

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Lessee - Presentation - Statement of Comprehensive Income

• Finance leases • Lease-related interest expense and amortization should be

presented in a manner consistent with how the lessee presents interest expense and amortization on similar assets • They are not required to be presented separately

• Operating leases • Lease expense should be presented as a single line item

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Lessee - Presentation - Statement of Cash Flows

• Finance leases • Principal payments of the lease liability within

financing activities • Interest on the lease liability in accordance with

Topic 230, Statement of Cash Flows • Operating leases

• All payments within operating activities • Except to the extent that those payments represent costs to bring another

asset to the condition and location necessary for its intended use, which should be classified within investing activities

• Variable lease payments and short-term lease payments not included in the lease liability within operating activities

• Supplemental cash flow disclosures (segregated between finance and operating leases) • Cash paid for amounts included in the measurement of lease liabilities,

segregated between operating and finance cash flows • Noncash lease liabilities arising from obtaining right-of-use assets

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Lessee - Disclosures - General

• Information about the nature of its leases and subleases • General description • Existence and terms and conditions related to

• Variable lease payments • Options to extend or terminate the lease • Residual value guarantees

• Restrictions or covenants imposed by leases • Information about leases that have not yet commenced • Information about significant assumptions and judgments

• Determination about whether a contract contains a lease • Allocation of contract consideration • Determination of the discount rate for the lease

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Lessee - Disclosures - Quantitative

• Total lease cost • Finance lease cost, segregated between amortization and interest • Operating lease cost • Short-term lease cost, excluding month-to-month leases • Variable lease cost • Sublease income, separated from finance or operating lease expense

• Net gain or loss recognized from sale and leaseback transactions • Amounts segregated between finance and operating leases

• Cash paid for amounts included in the measurement of lease liabilities, segregated between operating and finance cash flows

• Noncash lease liabilities arising from obtaining right-of-use assets • Weighted-average remaining lease term • Weighted-average discount rate • Maturity analysis of undiscounted lease liabilities,

reconciled to the statement of financial position • Related party transactions • Practical expedients that are elected, including the

classes of underlying assets to which they apply

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LESSOR ACCOUNTING

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Lessor - Sales-Type Lease - Measurement and Recognition

• If collectibility is probable, at commencement • Derecognize the underlying asset • Recognize a net investment in the lease, which is composed of a lease

receivable (measured at the present value of the lease payments not yet received and the amount expected to be received from a residual value guarantee by the lessee or any other third party) and the present value of any unguaranteed residual asset

• Recognize selling profit or loss • Initial direct costs are deferred and included in the measurement of the

net investment in the lease if the fair value of the underlying asset equals its carrying amount. If not, they are expensed

• After commencement • The net investment in the lease is increased based on the interest

method and reduced by the payments collected • Variable lease payments not included in the net investment in the lease

are recognized as income when they occur • Recognize impairment of the net investment in the lease, if any

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Lessor - Sales-Type Lease - Measurement and Recognition

• If collectibility is not probable, • The lessor would not derecognize the underlying asset • Payments received would be recorded as a deposit liability until

• Collectibility becomes probable and the sale is recorded and the deposit liability is derecognized and added to the net investment in the lease

• The lease is terminated or the underlying asset is repossessed, at which time the deposit liability is derecognized and lease income is recognized

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Lessor - Direct Financing Lease - Measurement and Recognition

• At commencement • Derecognize the underlying asset • Recognize a net investment in the lease, which is composed of a lease

receivable (measured at the present value of the lease payments not yet received and the amount expected to be received from a residual value guarantee by the lessee or any other third party) and the present value of any unguaranteed residual asset less any selling profit

• Recognize any selling loss • Initial direct costs are deferred and included in the measurement of the

net investment in the lease • After commencement

• The net investment in the lease is increased based on the interest method and reduced by the payments collected

• Variable lease payments not included in the net investment in the lease are recognized as income when they occur

• Recognize impairment of the net investment in the lease, if any

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Lessor - Operating Lease - Measurement and Recognition

• At commencement • Continue to recognize the underlying asset • Defer initial direct costs

• After commencement • Recognize lease payments as income, generally on a straight-line

basis • Variable lease payments are recognized as income when they

occur • Recognize impairment of the underlying asset, if any

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Lessor - Presentation

• Statement of Financial Position • For sales-type and direct financing leases, lease assets (net

investment in the leases) should be presented separately from other assets

• For operating leases, the underlying asset should be presented in accordance with other Topics

• Statement of Comprehensive Income • Lease income should either be presented as separate line items

or disclosed in the notes, including the line items that include the lease income

• Any profit or loss should be recognized in a manner consistent with the lessor’s business model

• Statement of Cash Flows • Cash receipts should be classified within operating activities

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Lessor - Disclosures - General

• Information about the nature of its leases and subleases • General description • Existence and terms and conditions related to

• Variable lease payments • Options to extend or terminate the lease • Options for a lessee to purchase the underlying asset

• Information about significant assumptions and judgments • Determination about whether a contract contains a lease • Allocation of contract consideration • Determination of the amount the lessor expects to derive from the

underlying asset following the end of the lease term • Related party transactions • Information about how the lessor managers its risk associated with the

residual value of the leased assets, including • It risk management strategy • The carrying amount of residual assets covered by residual value guarantees

not considered to be lease payments for the lessor • Any other means by which the lessor reduces its residual asset risk

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Lessor - Disclosures - Quantitative

• Lease income, in a tabular format • For sales-type leases and direct financing leases

• Profit or loss recognized at the commencement date • Interest income either in aggregate or separated by components of the net

investment in the lease • For operating leases, lease income relating to lease payments • Lease income relating to variable lease payments not included in the

measurement of the lease receivable • Sales-type and direct financing leases

• The components of the net investments in leases (lease receivable, unguaranteed residual assets, any deferred selling profit)

• Explain significant changes in the balance of unguaranteed residual assets and any deferred selling profit

• Maturity analysis of undiscounted lease receivables reconciled to the statement of financial position or disclosed separately in the notes

• Operating leases • Maturity analysis of undiscounted lease payments to be received,

separately from the analysis for sales-type and direct financing leases • Disclosures required by Topic 360 on property, plant and equipment for

underlying assets of operating leases separately from owned assets

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OTHER LEASE CONCEPTS

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Impairment

• Right-of-use assets are subject to the existing impairment guidance for long-lived assets

• If an impairment is recorded, the right-of-use asset is amortized on a straight-line basis

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Reassessment Requirements

• Reassess whether a contract contains a lease only if the terms and conditions change

• Reassess lease classification (and discount rate) • When the lease is modified • (Lessee only) If there is a change in lease term or the assessment

of whether the lessee is reasonably certain to exercise an option to purchase the underlying asset

• Reassess variable lease payments based on an index or rate any time the lease liability is remeasured

• Increases or decreases in the lease liability will be offset by an increase or decrease in the right-of-use asset, except for • Changes in variable lease payments based on a rate or index in the

current period are recognized in the statement of income • If the ROU asset is reduced to zero, any remaining amount is income

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Modifications

• A modification is a change to the terms and conditions of a contract that results in a change in the scope of or the consideration for a lease

• Treat a lease modification as a new lease when it grants the lessee an additional right of use and the additional right-of-use asset is priced commensurate with its standalone price

• Modifications that are not accounted for as a separate lease • Reassess the lease classification as of the effective date of the

modification • If a lease is partially or fully terminated, the right-of-use asset

should be decreased proportionally to the termination and recognize a gain or loss

• Otherwise, increases or decreases in the lease liability are accounted for in the same manner as reassessments

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Subleases

• The original (head) lease should accounted separately from the sublease

• The original lessee should • For an operating sublease, account for the head lease as it did

before the sublease • For a sales-type or direct financing sublease, derecognize the

right-of-use asset, retain the original lease liability and record a net investment in the sublease

• If the sublease relieves the original lessee of the primary obligation of the head lease, then it is a lease termination

• A sublease should be classified with reference to the underlying asset (i.e. the property, plant or equipment being leased)

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Sale and Leaseback Accounting

• A seller-lessee and buyer-lessor use the new revenue recognition standard (Topic 606) to determine whether a sale has occurred

• A leaseback, in isolation, does not preclude a sale

• A sale is precluded and the seller-lessee records a finance liability equal to proceeds received and the buyer-lessor records a finance receivable equal to amounts paid if • The leaseback is classified as a finance (lessee) or sales-type lease

(lessor), or • The seller-lessee has a repurchase option unless the option is only

exercisable at the then-prevailing fair market value and the leased asset is non-specialized

• If a sale has occurred, the sale should be recorded in accordance with Topic 606 (with gain or loss recognized in income immediately) and the leaseback in accordance with this Topic 842

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Lessee Involvement in Construction

• Lessee will recognized the entire construction project on its statement of financial position during construction only if the lessee controls the asset during construction

• If the lessee does not control the project during construction, any amounts paid by the lessee will be treated as prepaid lease payments

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TRANSITION AND NEXT STEPS

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Transition - Basics

• Modified retrospective transition • Required for all leases existing at, or entered into after, the beginning of the

earliest comparative period presented in the financial statements • An entity shall recognize and measure leases and adjust beginning equity as

if Topic 842 had always been applied • Practical expedients

• If an entity elects to not record lease assets and liabilities for short-term leases, then those leases should not be included in the transition

• The following must be elected as a package and applied to all expired and existing leases • The entity need not reassess whether any contracts contain leases • The entity does not need to reassess lease classification (Topic 840 operating

leases will be Topic 842 operating leases and Topic 840 capital leases will be Topic 842 finance leases)

• The entity does not need to reassess initial direct costs • The entity may elect for all leases to use hindsight regarding lease term and

impairment of the right-of-use-assets

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Transition - Disclosure and Business Combinations

• Disclosures • Requires disclosures under Topic 250, Accounting Changes and Error

Corrections • The nature of and reason for the change in accounting • The method of applying the change in accounting, including a

description of the prior-period information that has been retrospectively adjusted and the cumulative effect of the change on retained earnings

• If an entity should disclose any of the practical expedients for transition that it uses

• Business Combinations • Favorable or unfavorable leases should be derecognized (except for

those related to operating leases for lessors) • Adjust, by a corresponding amount

• The carrying amount of the right-of-use asset for lessees • Beginning equity for sales-type and direct financing leases

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Transition - Lessee

• Topic 840 Operating Topic 842 Operating or Finance • Recognize a lease liability based on the remaining rental

payments and probable residual value guarantee using a discount rate for the lease established at the beginning of the earliest comparative period presented

• Recognize a right-of-use asset based on the lease liability adjusted for prepaid or accrued rent, lease incentives, unamortized initial direct costs, any impairment and exit or disposal cost obligations

• Write-off to equity any initial direct costs that do not meet the definition under Topic 842

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Transition - Lessee

• Topic 840 Capital Topic 842 Finance • Recognize a lease liability and right-of-use asset at the carrying

amount of the lease asset and capital lease obligation • Include any unamortized initial direct costs that meet the Topic

842 definition in the right-of-use asset • Write-off to equity any initial direct costs that do not meet the

definition under Topic 842 and are not included in the measurement of the capital lease asset under Topic 840

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Transition - Lessee

• Topic 840 Build-to-Suit • If an entity has recognized assets and liabilities solely as a result

of a transaction’s build-to-suit designation in accordance with Topic 840, • Derecognize those assets and liabilities and recognize any difference

as an adjustment to equity

• If the construction period of the build-to-suit lease concluded before the beginning of the earliest comparative period presented in the financial statements and the transaction qualified as a sale and leaseback transaction in accordance with Subtopic 840-40, • Follow the general lessee transition requirements

for the lease

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Transition - Lessor

• Topic 840 Operating Topic 842 Operating • Continue to recognize the carrying amount of the underlying asset

and any lease assets or liabilities • Account for previously recognized securitized receivables as

secured borrowings • Write-off to equity any initial direct costs that do not meet the

definition under Topic 842 • Topic 840 Direct Financing or Sales-Type Topic 842 Direct

Financing or Sales-Type • Continue to recognize a net investment in the lease

• Topic 840 Leveraged Leases • Continue to account for the lease as a leveraged lease • If the lease is modified, it will be treated as a new lease

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Transition - Sale and Leaseback Transactions

• Leases that qualified as sale and leaseback transactions shall not be reassessed • Sale and capital leasebacks shall continue to recognize any deferred gain

or loss • Sale and operating leasebacks shall recognize

• Any deferred gain or loss not resulting from off-market terms to equity or to earnings

• Any deferred loss resulting from off-market terms as an adjustment to the leaseback right-of-use asset

• Any deferred gain resulting from off-market terms as a financial liability

• Failed sale and leaseback transactions should be reassessed to see if a sale would have occurred under Topic 842 • A sale would follow the sale and leaseback guidance above • No sale would be accounted for as a financing transaction

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Effective Date

• Public companies* = fiscal years beginning after December 15, 2018, and interim periods within those fiscal years • *A public business entity, a not-for-profit entity that has issued or is a

conduit bond obligor for securities that are traded, listed, or quoted on an exchange or an over-the-counter market, and an employee benefit plan that files or furnishes financial statements with or to the U.S. Securities and Exchange Commission

• Calendar year entities with quarterly statements = March 31, 2019

• All other entities = fiscal years beginning after December 15, 2019, and interim periods within fiscal years beginning after December 15, 2020. • Calendar year entities = December 31, 2020

• Earlier application is permitted.

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What Do I Need to Do Now?

• Take inventory • Gather information about existing leases • Create processes and controls to accumulate information that is

complete and timely • Review modifications to ensure compliance with Topic 842

• Evaluate the expected impact • Design and implement controls to evaluate contracts, modifications and

potential impairment • Determine which practical expedients to apply • Educate users of your financial statements about the upcoming change

and its expected impact on your financial statements

• Prepare for implementation • Upon adoption, all comparative periods presented must reflect the

change so gather the information you will need for it

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? QUESTIONS

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If You Enjoyed This Webinar…

Upcoming Courses: • 4/13 & 4/20: First Quarter Accounting & Financial Reporting Issues Update

• 5/11 & 6/1: Unclaimed, Unidentified but Undeniable - A Primer on Managing your Abandoned Property

Recent Publications: • MHM Messenger: FASB Unveils New Leasing Standard

• MHM Messenger: Revenue Recognition Serial Part 5: Step 4 - Allocating the Transaction Price

• MHM Messenger: Eight Changes Proposed to Accounting for Cash Flows

• MHM Messenger: Guidance Streamlines Equity Method Accounting

• MHM Messenger: Principal Versus Agent Consideration Finalized for Revenue Recognition Standard

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