1. An update on:
New Leasing Standards

2. Vaibhav Tandon, CPA Audit and Accounting Manager, Gumbiner Savett
Extensive experience with privately held clients in retail distribution, wholesale, consumer finance, and manufacturing industries
Expert in US GAAP and SOX control development, and compliance testing and internal audit
Has worked at KPMG in India and in the US

3. ASU
ASU , Leases
Creates Topic 842, Leases, in the FASB Codification
Supersedes FASB ASC 840, Leases
Applies only to leasing of property, plant, and equipment
Entities with numerous equipment and real estate leases most affected

4. Implementation
Has your company begun the transition to the new standard?
National
20-49 employees
50-99 employees
Employees
Employees
Employees
1,000+ employees
Yes
17%
18%
19%
13%
22% No
80%
81%
78%
79%
86%
75%
Don’t know or no answer 3% 4% 1%
Source: Robert Half Management Resources 2017 survey of more than 2,200 US CFOs

5. Implementation
As part of that transition, have you begun the diagnostic work necessary to determine the level of effort which will be required for you to be ready to adopt the new standard?
National
20-49 employees
50-99 employees
Employees
Employees
Employees
1,000+ employees
Yes, completed
18%
15%
22%
23%
31%
26%
11%
Yes, in progress
64%
66%
62%
51%
65%
75%
No, haven’t started
17%
16%
13%
19% 9%
14%
Don’t know or no answer 0% 1%
Source: Robert Half Management Resources 2017 survey of more than 2,200 US CFOs

6. Highlights Industry sectors expected to be most impacted include:
Large drugstore, retail, and restaurant chains
Telecom
Airlines
Banks
Grocery stores
Will add lease-related assets and liabilities at many companies
May affect compliance with contractual agreements and loan converts

7. Highlights
Operating leases will now be recorded in the statement of financial position as assets and liabilities
Retains distinction between finance leases and operating leases

8. 2016 KPMG Survey (140 public companies)

9. Highlights No more “bright-line” thresholds as under current U.S. GAAP
75% life
90% fair value
Bargain purchase option
Title transferred at the end of the lease term
FASB ASC notes that numerical thresholds above are “one reasonable approach” to assessing lease classification criteria

10. Highlights
Requires a lessee to recognize the assets and liabilities that arise from leases (operating and finance)
All leases create an asset and a liability for the lessee based on the definitions of assets and liabilities in FASB Concept Statement No. 6, Elements of Financial Statements
Assets are probable future economic benefits obtained or controlled by a particular entity as a result of past transactions or events
Liabilities are probable future sacrifices of economic benefits arising from present obligations of a particular entity to transfer assets or provide services to other entities in the future as a result of past transactions or events

11. Highlights
For leases with a term of 12 months or less, a lessee is permitted to make an accounting policy election not to recognize lease assets and least liabilities
If a lessee makes this election, it should recognize lease expense for such leases generally on a straight-line basis over the lease term
Election needs to be consistently applied for similar leases

12. Scope
Applies to leases and subleases of property, plant, and equipment based on a contract that conveys control to the lessee for a period of time
ASU does not apply to:
Leases of intangible assets
Leases to explore for or use minerals, oil, natural gas, or similar resources
Leases of biological assets, including timber
Leases of inventory (excludes long term assets subject to depreciation)
Leases of assets under construction

13. Definition of a Lease
“Under the lessee accounting model in previous GAAP, the critical determination was weather a lease was a capital lease or an operating lease because lease assets and lease liabilities were recognized only for capital leases. Under Topic 842, the critical determination is whether a contract is or contains a lease because lessees are required to recognize lease assets and lease liabilities for all leases- finance and operating- other than short term leases (that is, if the entity elects the short-term lease recognition and measurement exemption). Topic 842 provides detailed guidance and several examples to illustrate the application of the definition of a lease to asset entities in making this critical determination.”
-ASU Summary, Page 5

14. Definition of a Lease What is a lease?
Understanding the definition and determining whether a contract is or contains a lease will be crucial.
Much more extensive than previous US GAAP
Previous GAAP Definition
New Definition Under FASB ASC 842
An agreement conveying the right to use property, plant, or equipment (land and/or depreciable assets) usually for a stated period of time.
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

15. Definition of a Lease
A lease contract, or part of a contract, that conveys the right to control the use of identified property, plan or equipment (an identified asset) for a period of time in exchange for consideration.
Lessor
Lessee
Right-of-use asset
Lease payments

16. Identifying a lease
Lease contracts in the scope of FASB ASC 842 involve
An identified asset
That is explicitly or implicitly specified
Supplier has no practical ability to substitute and would not economically benefit from substituting an asset
The right to control the use curing the lease term
The ability to obtain substantially all economic benefits from the use of the asset
Decision-making authority over the use of the asset

17. Identified asset First step in assessing whether a contract is a lease
Not determined by the header of the document
Can be either made explicitly or implicitly
Concept of an “embedded lease”
Need to look at agreements for implicitly identified assets
Substitution rights, where two conditions must exist within the contract in order for a suppliers substitution right to be considered substantiative
Supplier has the practical ability to substitute alternative assets throughout the period of use
Supplier would benefit economically from the exercise of its right to substitute the asset

18. Right to Control the Asset
Comprises both consideration of power and benefits regarding use of the asset
Consistent with concept of control in FASB ASC 606, Revenue from Contracts with Customer, and FASB ASC 810, Consolidation
Entities now are required not only to asses the benefits received from the asset, but also assess whether they have the ability to direct the use of the asset

19. Right to Control the Asset
An entity has the right to direct the use of the asset throughout the period of use in either of the following situations:
The entity has the right to direct how and for what purpose the asset is used throughout the period of use
The decisions about how and for what purpose the asset will be used are predetermined and at least one of the following conditions exist:
The entity has the right to operate the asset (or direct others to operate) throughout the period of use without the supplier having the right to change those operating instructions
The customer designed the asset (or specific aspects of it) in a way that predetermines how and for what purpose the asset will be used throughout the period of use

20. Commencement Date
The date on which a lessor makes an underlying asset available for use by the lessee
Date on which the lessee is required to measure and record both:
The lease liability at the present value of the lease payments not yet paid, using the discount rate for the lease
The right-of-use asset

21. Incremental borrowing rate
Discount rate
The rate that the entity uses to discount future lease payments should be the rate implicit in the lease if it is readily determinable
If not determinable, the entity should use its incremental borrowing rate
Implicit Rate
Incremental borrowing rate

22. Discount Rate
A lessee may use a single discount rate to apply to a portfolio of leases assuming the result would not be significantly different than individual discount rates
Private entities are permitted an accounting policy election to use a risk free discount rate for the lease (normally the federal funds rate)

23. Renewal Options
Include payments to be made in optional periods only if the lessee is reasonably certain to exercise an option to extend the lease or not to exercise the option to terminate the lease
Optional payments to purchase the underlying asset should be included in the measurement of lease assets only if the lessee is reasonably certain to exercise that purchase option

24. Lease Term Non-Cancellable Lease Period Periods Likely to Extend
The lease term should be the sum of the non-cancellable period of the lease along with any periods covered by an option to extend the lease if the lessee is reasonably certain to exercise that option as well as any options to extend that would be controlled by the lessor
Non-Cancellable Lease Period
Periods Likely to Extend
Options to Extend Controlled by Lessor

25. Segregating Lease/Non-Lease Components
Many contracts contain both lease and non-lease components
ASU provides expanded guidance on how entities should account for contracts with lease and non-lease components
Subject to reallocation by lessee (only) upon a remeasurement of lease liability and contract modification not accounted for as a separate contract (lessee and lessor)
Will have significant finance reporting consequence since operating leases are now capitalized while services are not
There is a practical expedient that allows lessees to account for the non- lease components together with the related lease components as a single lease component
Policy election by class of underlying asset & does not apply to lessors

26. Lease Modifications FASB ASC Glossary definition:
“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”
Example:
Change to the terms and conditions of the contract that adds or terminates the right-to-use or more underlying assets or extends or shortens the contractual lease term
When lease modification occurs, the lessee has to determine whether the lease modification will be accounted for as a separate contract or as a change to the existing contract

27. Lease Modifications
Required to account for modification to lease contract as a separate contract when:
Modification grants lessee additional right-or-use not included in original lease
Lease payments increase commensurate with standalone price for additional right-of-use
If lease modification is not accounted for as a separate contract, an entity is required to:
Re-assess classification of the lease as of the affective date of the modification based on new terms and conditions
Re-measure variable lease payments based on index at the remeasurement date and update discount rate

28. Lease Modifications
Four different contract modifications where remeasurement by lessee is required:
Fully or partially terminates and existing lease
Changes the consideration in the contract only
Extends or reduces the terms of an existing lease other than through the exercise of a contractual option to extend or terminate the lease
Grants the lessee an additional right-of-use not included in the original contract

29. Operating Leases
Classify all cash payments within operating activities in the SOCF
Recognize a single lease cost, calculated so that the cost of the lease is allocated over the lease term on a straight line basis
Recognize a right-of-use asset and a lease liability, initially measured at the present value of the lease payments, in the statement of financial position

30. Operating Leases
Variable lease payments that depend on an index or rate initially measured using the index or rate at the commencement date
Not updated unless a remeasurement event takes place
To the extent more payments are shifted to variable lease payments, absent a remeasurement event, balance sheet right-of-use asset and lease liability would decrease
Shifting in lease arrangements as a result

31. Operating Leases Lessee accounting for operating leases:
Variable lease payments recognized when achievement of the specified target becomes probable
Residual value guarantees are included in lease payments when they are considered probable of being owed
Initial direct costs are capitalized if incremental
Costs which would not have been incurred if lease not obtained
Definition more narrow than current practice

32. Operating Leases remeasurement
Lease shall remeasure lease payments if any of the following occur:
Lease is modified, not accounted for as separate contract
Contingency resolved so that some or all of variable lease payments not meet the definition of lease payments
Change in assessment of lease term
Change is assessment of whether the lessee is reasonably certain to exercise or not exercise a purchase option
Change in amounts probably of being owed by lessee under residual value guarantees
Lease classification and discount rates are remeasured when:
Lease is modified and not accounted for in separate contract
Triggering event takes place causing lease term/purchase option to be reassessed

33. Operating Leases remeasurement
Lessee shall reassess the lease term/option to purchase if any of the following occurs:
Significant event or change in circumstances that is within the control of the lessee directly affecting whether they are reasonably certain to exercise or not exercise an option to extend or terminate the lease or purchase the asset
Event written into the contract that obligates the lessee to exercise an option to extend/terminate the lease
Lessee elects to exercise an option even though it was determined the lessee was not reasonably certain to do so
Lessee elects not to exercise an option even though it was pre-determined they were reasonably certain to do so

34. Finance Leases
Lessee required to classify a lease as a finance lease when it meets any one of the following criteria:
Ownership of the underlying asset transfers to the lessee by the end of the lease term
Lease grants the lessee an option to purchase the lessee is reasonably certain to exercise
Lease term is the major part of the remaining economic life of the asset
Present value of the sum of the lease payments and any residual value guarantees 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
Underlying asset is specialized and expected to have no alternative use to the lessor at the end of the lease term

35. Finance Leases- Lessee Accounting
Recognize a right-of-use asset and a lease liability in the statement of financial position
Recognize interest of the lease liability separately from amortization of the right-of-use asset in the statement of comprehensive income
Classify repayments of principal portion of lease liability within financing activities and payments of interest on the lease liability and variable lease payments within operating activities in the statement of cash flows

36. Finance Leases- differences
No bright lines incorporated into criteria
Guidance no longer uses term “bargain purchase option”
Now five capital lease criteria instead of four. Addition of:
“Specialized nature that is expected to have no alternative use to the lessor”

37. Lessor Accounting
“The accounting applied by a lessor is largely unchanged from that applied under previous GAAP.”
-ASU Summary, Page 4
Financial reporting outcomes are largely unchanged for lessors from previous standards, with some limitations

38. Direct Financing Lease
Lease Term
If a lessor doesn’t have a sales-type lease, it is either classified as a direct financing lease or an operating lease
Sales-type lease
Direct Financing Lease
Operating Lease

39. Lessor Accounting
Aligns with new revenue recognition standard (FASB ASC 606)
Leasing is a revenue generating activity
Lessor precluded from recognizing selling profit or sales revenue at lease commencement for a lease that does not transfer control of the underlying asset to the lessee
Lessor accounting in FASB ASC 842 does not differentiate between leases of real estate and leases of other assets

40. Lessor Accounting Variable payments not aligned with FASB ASC 606
Lessor does not recognize variable lease payments until circumstances on which the variable lease payment are based occur
Not consistent with concept of variable consideration in FASB ASC 606
Services in a lease contract under scope of FASB ASB 842 will have slower recognition than if the same service had been provided outside the lease
Lessors with high variable leases payments can have sales-type and direct financing leases under FASB ASC 842

41. Leaseback and Sale Transactions
Substantial change from previous U.S. GAAP
Transfer of asset must meet requirements for a sale in FASB ASC 606
Many transactions involving real estate will qualify for this accounting that would have qualified for this accounting under current U.S. GAAP
Opposite could be the case for sale and leaseback transactions involving assets other than real estate

42. Leaseback and Sale Transactions
Determine if a sale occurred:
Apply FASB ASC 606
If there is a sale, apply FASB ASC 642 to account for leaseback
Finance leasebacks preclude a sale
Repurchase options do not preclude a sale if exercisable at the then prevailing fair value
Accounting for the sale:
Gain or loss on sale recognized the same as for the sale of any other nonfinancial asset
Lessor(buyer) accounts for purchase consistent with that of other nonfinancial assets

43. Related Party Leases
Recognition/measurement requirements for all leases should be applied by lessees and lessors that are related parties on the basis of legally enforceable terms and conditions of the arrangement
In separate financial statements of the related parties, the classification and accounting for the leases should be the same as for leases between unrelated parties
Must also apply disclosure requirements of FASB ASC 850 (Related Party Disclosures)

44. Related Party Leases
Account for related-party leases based on legally enforceable terms and conditions of the lease
Some related party transactions are not documented

45. Disclosures
Both lessee and lessor are required to present qualitative and quantitative information about their leases, judgements made, and amounts recognized in the financial statements relating to those leases
Both lessees and lessors should consider the level of detail necessary to satisfy disclosure objectives and appropriately aggregate and disaggregate disclosures in other to ensure the information is useful to investors
Detailed disclosure requirements:
For lessee: ASC to ASC
For lessor: ASC to ASC

46. Important Dates/Transitioning
Amendments effective for FY beginning after December 15, 2018 for:
PBEs, NFP entities, or EBP plans that file with the SEC
Amendments effective for all other entities for FY beginning after December 15, 2019 and interim periods within fiscal years beginning after December 15, 2020
Early adoption permitted
Modified retrospective approach, where entities run off those leases existing at the beginning of the earliest comparative period presented
For operating leases, a lessee will present a lease liability n the statement of financial position at each reporting date equal to the present value of the remaining minimum rental payments and a right-of- use asset that is derived from the lease liability

47. Questions?

48. Vaibhav Tandon, CPA Audit and Accounting Manager p. 310.828.9798e.

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