The Leases are coming… to your balance sheet...The Leases are coming… to your balance sheet December 11, 2017 Marybeth Shamrock Accounting Change Services Leader and Advisory Leasing

The Leases are coming… to your balance sheet

December 11, 2017

Marybeth ShamrockAccounting Change Services Leader and Advisory Leasing LeaderKPMG LLP

Shane HendricksKPMG Leasing Tool Implementation LeaderKPMG LLP

Shari MagerPartner, Accounting Advisory ServicesKPMG LLP

© 2017 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”),a Swiss entity. All rights reserved. NDPPS 521102

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3© 2017 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. NDPPS 725567

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Agenda

Current State of Affairs

Effective Implementation

Question and Answer Session

What Preparers Have Said: Results from KPMG’s recent accounting change survey

Our Perspective

Current state of affairs


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Effective dates

Public business entities, certain not-for-profit entities, and certain employee benefit plans

— Interim and annual periods in fiscal years beginning after December 15, 2018

All other entities — Annual periods in fiscal years beginning after December 15, 2019, and interim periods in fiscal years beginning one year later

Early Adoption — Early adoption permitted for all entities at any time after issuance

Date of initial application — The first day of the earliest comparative period presented in the first annual financial statements post-effective date

Transition Relief — The board has proposed an amendment to give all companies the option to use the effective date of the new leases standard as their date of initial application in transition

— Companies that elect this transition option would not have to adjust their comparative financial statements for effects of the new standard or make the new required lease disclosures for periods before the effective date

Effective implementation


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Potential impacts of lease accounting changes

Accounting and Reporting Impacts— Increased management judgment — Potential for increased level of effort/reporting volatility— Potential dual reporting (U.S. GAAP and IFRS) — New ROU assets can be impaired— New book-tax differences — New accounting policies and procedures— Significant new disclosure requirements— Opening balance sheet and comparative

periods— Transition & ongoing external audit

effort

Systems & Processes Impacts— Existing lease systems functionality shortfalls— Need complete lease inventory— Capturing salient lease terms in a database— Expanded data needs may necessitate a need for

forecasting and other systems— Increased management judgment — Changes to process documentation and

SOX 404 testing will be required


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Potential impacts of lease accounting changes (continued)

People & Change Impacts— Need for strong project management

office — Effective governance structure and

communication protocols— Communication and training to

impacted departments — Support of the conversion project

and ongoing accounting— Other departments potentially

affected: FP&A and Tax

Business Impacts— Moderate to significant changes for

- Lessees- ROA calculations- Current ratios - Debt-to-asset ratio- Leverage ratios

— Buy versus lease decisions— Potential need to renegotiate current lease terms— Potential impact on state and local taxes paid (e.g.,

apportionment of taxable income)

What preparers have said

Results from KPMG’s recent accounting change survey


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Expected level of impact of new leases standardQ. What level of impact do you expect in each of the following areas as a result of the new leases standard? Rate each on a scale of 1 to 5 (1 = no impact, 5 = significant impact):

77%

62%

56%

57%

56%

55%

46%

37%

16%

19%

15%

27%

32%

27%

29%

25%

25%

24%

28%

26%

8%

12%

12%

15%

16%

20%

29%

39%

56%

55%

0% 20% 40% 60% 80% 100%

Other

Investor relations / communications

Tax reporting

Leasing practices (lease vs. purchase decisions)

Operations

Income statement

Financial ratios / debt covenants

Systems

Disclosures / reporting

Balance sheet

1-2 3 4-5

Mean

3.7

2.4

3.6

3.1

2.8

2.6

2.4

2.4

2.2

1.7


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Progress on implementation to the new leases standardQ. Please indicate the progress your organization has made against each of the following implementation activities related to the new leases standard:

32%

66%

59%

74%

67%

43%

61%

55%

35%

51%

23%

23%

3%

32%

33%

21%

28%

52%

23%

35%

51%

23%

47%

25%

2%

5%

2%

4%

4%

5%

6%

13%

16%

28%

49%

64%

<1%

3%

3%

1%

1%

11%

3%

1%

10%

2%

4%

0% 20% 40% 60% 80% 100%

Other

Complete implementation

Conduct training

Analyze tax impacts

Calculate the transition impact

Gather and validate data

Design software or process solution

Develop system or process requirements

Perform accounting assessment

Select lease accounting software

Perform lease inventory

Establish program management team

No progress Some progress Activity completed Not applicable


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Challenges in implementing the new leases standardQ. What challenges are you facing related to the implementation of the new leases standard that you did not anticipate?*

0%

22%

11%

33%

11%

44%

11%

44%

78%

11%

19%

22%

24%

33%

35%

41%

48%

44%

10%

19%

21%

25%

30%

37%

37%

48%

49%

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

Other

Defining a lease

Reporting on the proper accounting treatment and disclosures

Estimating operating costs or service components in leases toexclude from capitalization

Establishing assumptions and inputs such as discount rate andlikelihood of renewal

Locating a lease

Abstracting and entering leases into a leasing system

Selecting and implementing an adequate leasing system

Identifying embedded leases

Total (n = 63) Public (n = 54) Private (n = 9*)

* Among those who selected “Yes, there are surprises that we did not anticipate” when asked about unanticipated challenges related to the leases implementation effort

Other includes:

— Identifying all leases

— Joint operations effect on leases and disclosures

— Open issue with easements

— Separating non-lease components

— Standard setter feedback

— Using hindsight as a practical expedient


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Expected time to implement changes to existing system or new software solutionQ. The total amount of time to implement changes to existing system or new software solution for the new leases standard is expected to be:

42%

8%

7%

15%

17%

10%

42%

17%

8%

8%

13%

13%

42%

15%

7%

10%

14%

12%

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

Do not know / Not sure

Over 12 months

10 to 12 months

7 to 9 months

4 to 6 months

1 to 3 months

Total (n = 241) Public (n = 182) Private (n = 59)


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Early adoption of the new leases standardQ. Has/will your organization early adopt(ed) the new leases standard?

8%

81%

11%8%

83%

10%8%

75%

17%

0%

20%

40%

60%

80%

100%

Yes No Do not know / Not sure

Total (n = 245) Public (n = 186) Private (n = 59)

Our perspective


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Where the work is…

— Identify project team and objectives

— Establish governance protocols

Low— Identify in-scope

population of lease agreements

Medium

— Populate a database of lease terms

— Model and respond to business impacts

High

— Consolidate lease accounting systems/spreadsheets

— Update lease accounting policies and procedures

— Assign accounting assumptions and pool similar leases

— Prepare transitional financial statements and disclosures

— Transition to future state leasing process

Future

How to get there…


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Where to begin: Develop a structured approach

After identifying a project team, determine the best approach to achieve your objectives...

Advantages:— Supports consistency of data capture— Controlled, easy-to-oversee— Establish center of excellence— Streamline timing of data Disadvantages:— May not be a viable go-forward model— Challenges presented with leases in other languages— Requires full-time project team

Centralized

Advantages:— Establishes a viable go-forward process— Easier for individual BU reconciliations/processing— Eliminates language challenges— Obtain greater buy-in across the organizationDisadvantages:— Requires extensive training and communication— Difficult to ensure consistency of data capture— Prolonged close process

Decentralized

Considerations— Personnel & other

resources— Timeline — Nature of operations— Risks— Current location/state

of lease data

Hybrid Approach

Outsource Lease Abstraction


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Why is it important to start now?

Is the lease population complete??

Does the company have systems and/or processes to store data and facilitate Day 2 accounting consequences like reassessment, impairment?

— Contract reviews for potential embedded leases— Leases previously not identified as leases

Resource needs for data abstraction (additional data needed for accounting and new disclosures)??

Who will make and review lease-by-lease accounting estimates (e.g., residual value, discount rate, reasonably certain assessment, or others)??

?


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Questions to consider when selecting a lease accounting system

Does the application fully support foreign currency needs?

Does it capture items such as variable lease payments, short term leases, the weighted average remaining lease term, or weighted average discount rate to fully support the disclosure requirements?

Does it support tracking and recording impairments of ROU Assets? Reassessments? Modifications?

Will the application or its sponsors be able to provide support for ongoing updates as additional interpretive guidance and best practices emerge over the next few years?

Does the application have features that support effective project management and oversight of the accounting change project, which will entail the management of thousands of leases?

1

2

4

5

6

3

Does the application support dual reporting?

Question and answer session

Thank you

Contact usMarybeth ShamrockAccounting Change Services Leader and Advisory Leasing LeaderKPMG LLPT: 216-875-8158E: [email protected]

Shane HendricksKPMG Leasing Tool Implementation LeaderKPMG LLPT: 214-840-2063E: [email protected]

Shari MagerPartner, Accounting Advisory ServicesT: 408-367-7661E: [email protected]

© 2017 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. NDPPS 725567

The KPMG name and logo are registered trademarks or trademarks of KPMG International.

The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation.

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Some or all of the services described herein may not be permissible for KPMG audit clients and their affiliates.

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The Leases are coming… to your balance sheet...The Leases are coming… to your balance sheet December 11, 2017 Marybeth Shamrock Accounting Change Services Leader and Advisory Leasing