Accounting Changes Snapshot Presented by Shawn Halladay Managing Director The Alta Group March 23, 2012

Topics  The current environment  What is changing?  Market impact  Engaging the customer  Lessor concerns

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

What is Changing? ED productFAS 13 product Not retained Operating lease Right-of-use lease Capital lease

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 oReceivable and residual approach oSales-type leases affected

Market Impact Lessor consequences and responses Lessor accounting requirements Proposed accounting changes Lessee impact

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!

Engaging the Customer

 Proactive approach o Address concerns o Share perspective

Engaging the Customer  Needs focus o Cash flow o Asset utilization o Financial factors o Tax concerns  Customer feedback  Customer resources

Lessor Concerns ?????

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

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)

Practice Issues Loan with balloon Sales-type lease Receivable and residual Receivable $ 6,200 Balloon/residual $ 3,800 $ 2,850 Net investment$ 10,000 $ 9,050

Practice Issues Loan with balloon Sales-type lease Receivable and residual Finance income $ 1,970 $ 1,727 Sales profit $ 2,500 $ 2,743 Net investment$ 4,470

17 Operational Implications  Residual assets  Revenue recognition  Impairment

18 Operational Implications  Modifications  Renewals/payoffs  Lessee data requests  Management reporting  Disclosure requirements  Processes, procedures, and internal controls

19 System Issues  Front-end integration  Different information requirements  Different calculations  Multiple net investment links  New output  Scalability

Product Inventory  Standard economic products  Funding products 20

21 Implementation – Planning  Project team and definition  Timeline  Systemic impact assessments  Strategic modeling  Get to work

22 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

6 Micro Frame of Reference  System impact assessment  Change analysis  Front-end versus back-end  Vendor readiness  Application hurdles  Process versus output changes  Scope resolution

6 Micro Frame of Reference o Cutover o Parallel/dual o Transition o Classification o Mapping o Rebooking/conversion o Restatement  Approach  Tool availability

Implementation – Transition 25  Simple versus total retrospective  Product identification  Classification difficulties  Mapping  Prior data capture  Fair value assessments

26 Implementation – Planning  Project team and definition  Timeline  Systemic impact assessments  Strategic modeling  Get to work

27 Conclusion Questions and answers