Overview of FASB ASC 842 Leases Accounting for Leases Under the New Standard Katie Snyder, CPA

Background In 2005, SEC calculated $1.25 trillion of leasing commitments were not on the balance sheet for US companies. The new standards is to move these onto the balance sheet.

Effective Date Public: Fiscal years beginning after December 15, 2018 All Others: Fiscal years beginning after December 15, 2019. Interim periods within fiscal years beginning after December 15, 2020. Early adoption is permitted

Definition of a “lease” “Topic 842 defines a lease as a contract, or part of a contract, that conveys the right to control the use of identified property, plant, or equipment (an identified asset) for a period of time in exchange for consideration. Control over the use of the identified asset means that the customer has both (1) the right to obtain substantially all the economic benefits from the use of the asset and (2) the right to direct the use of the asset.” ASU 2016-02

Identifying a Lease

Lease or not a Lease Blue Paint Inc. has entered into a contract with Mast Shipping for the transportation of goods from Hong Kong to San Francisco on a specified ship. The ship is explicitly specified in the contact and Mast Shipping does not have substitution rights. The contract specifies the cargo to be transported on the ship and the dates of use. The cargo will occupy substantially all of the capacity of the ship. Mast Shipping will operate and maintain the ships and is responsible for safe passage of the cargo. Blue Paint is prohibited from operating the ship.

Lease or not a Lease Blue Paint Inc has entered into a five year contact with Mast Shipping for the use of a specified ship. The contract identifies the Titanic as the ship and does not have substitution rights. Blue Paint decides what cargo, when, and where deliveries will be made. There are restrictions in the contacts that prevent Titanic from carrying hazardous materials or entering waters at a high risk of piracy. Mast Shipping will operate and maintain Titanic and is responsible for safe passage of the cargo.

Lease or not a Lease Jim enters into a contract with Sue for the use of a vehicle for one week to transport cargo from Cleveland to Columbus. Sue does not have substitution rights. The contract specifies what cargo is permitted to be transported for the period of the contract. Jim is able to choose the details of the journey (such as route) within the parameters of the contract. Jim does not have the right to use the vehicle after the specified trip is completed.

Short Term Leases Practical Expedient Lease terms 12 months or less Does not have a purchase option the lessee is reasonable certain to exercise If there is a renewable clause, renewal is not reasonably certain at the beginning of lease term If the following are met the lease falls under the operating lease model outlined in ASC 840

Lessee Accounting Recognize: Right of use (ROU) asset Lease liability

Example 5 annual payments of $100,000 that increase by $2,000 each year The incremental borrowing rate is 4% Payment Date Payment 1/1/2019 $100,000 1/1/2020 $102,000 1/1/2021 $104,000 1/1/2022 $106,000 1/1/2023 $108,000

Example PV of lease payments = $380,112 Incurred $10,000 in initial direct costs Prepaid $100,000 at lease commencement Received a lease incentive of $15,000 at lease commencement

Example

Types of Leases Lessee Lessor Financing (formerly capital) Operating Sales-type Direct financing

Lessee Lease Types

Permitted Quantitative Thresholds Major part = 75% or more Substantially all of an asset’s fair value = 90% or more Near the end of economic life= 25% or less of economic life remains

Operating ROU

Finance ROU

Practical Expedient ASC 842-10-65-1 Applicable to leases that have commenced before the effective date Must elect all three together No need to reassess the existence of a lease No need to reassess lease classification No need to reassess initial direct costs

Lessee Financial Statements

Lessor Lease Types

Lessor Lease Types (continued)

Lessor Financial Statements

How Do You Begin to Implement? Familiarize yourself with the new standards Gather an inventory of your leases Determine your method of implementation Make necessary changes to operations, systems, processes, and internal controls Inform stakeholders

Questions? Katie Snyder, CPA | Supervisor | Rea & Associates, Inc.   Katie Snyder, CPA | Supervisor | Rea & Associates, Inc. 545 North Market Street Wooster, Ohio 44691 Phone 330-264-0791  |  Direct 330-249-3457  |  Cell 330-209-3651  e-mail katie.snyder@reacpa.com