ASU 2016-02 Leases

When is it effective? Non Public Entities must adopt beginning in 2020

Don’t Delay Start Planning now Suggestions for Implementation Form task force or steering committee; designate individual to champion – engage entire organization Learn the standard - Financing vs. Operating leases Compile inventory of leases Identify potential changes to internal controls Assess Technology requirements Discuss with stakeholders Audit Committee Lenders etc. May require modifications to covenants Decide on transition method – including practical expedients Post adoption considerations

ASU 2016-02 All leases now on Balance Sheet Financial Statement Finance Lease Operating Lease Balance Sheet Recognize an ROU asset and a lease liability, initially measured at the present value of the lease payments. Include initial direct costs in the initial measurement of the ROU asset. Income Statement Recognize interest on the lease liability separately from amortization of the ROU asset. Recognize a single lease cost, calculated so that the cost of the lease is allocated over the lease term, generally on a straight-line basis. Cash Flows Classify repayments of the principal portion of the lease liability within financing activities and payments of interest on the lease liability and variable lease payments within operating activities. Classify all cash payments for leases within operating activities.

Definition of a lease Agreement that conveys the right to control the use of an identified asset for a period of time in exchange for consideration; Right to obtain substantially all the economic benefits from the asset Right to direct the use of the asset

What leases to you have? Copiers, computers and other small office equipment Autos Machinery Real Estate Are there leases embedded in service contracts? Maybe

Internal Controls How are leases processed/approved today? How are they tracked/maintained Manually or electronically? Centralized or by location/business unit? How are modifications or amendments handled? Reporting to lessors?

Is Excel Enough? IT Considerations Volume of lease transactions Operating leases - principal and interest treated differently than prior GAAP Can fixed assets system handle depreciation? Disclosure requirements Is Excel Enough?

Communications Have discussion begun with; Audit committee Lenders – do covenants need to be rewritten? Lessors modification to existing agreements do you need information? Within Company Legal, Tax, Financial Planning & Analysis, Treasury, Facilities, Procurement Employee Training

Transition Restate 2019; adjustment to 1/1/2019 Retained Earnings consistent disclosures consistent ratios & metrics (EBIT, EBITDA, GP) Do not restate 2019; adjustment to 1/1/2020 Retained Earnings duplicate disclosures/systems & methods – need to maintain old GAAP disclosures inconsistent ratios & metrics Practical Expedients Package - all or none Whether an expired or existing contracts are or contain leases Classification of any expired or existing lease Indirect Cost for any existing leases

The Road Ahead Adoption is the race to the starting line Solutions need to comprehend post adoption How to handle New leases & terminations of existing Modifications Disposals / return of equipment Changes to office space, etc. Communication among parties