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© 2013 CBRE Page 1
The New Lease Accounting Standard: The Journey Continues
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© 2013 CBRE Page 2
Before We Begin
It is important to remember that the Lease Accounting standard is still in the
developmental stages and that this presentation is based on our best
interpretation of available information, however, this should, by no means be
considered authoritative in nature.
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© 2013 CBRE Page 3
The Speaker
• James N. Tansey
Jr. (Nick) ‐
Senior Vice
President with CBRE. Nick has been in the real
estate industry for 17 years, focused primarily
on building and leading large operating groups
that perform both accounting and lease
administration for many of CBRE’s
largest
customers. Prior to that, he spent 8 years with
Arthur Andersen focusing mostly on internal
control and SAS 70 review programs. Nick is a
Mississippi CPA and a member of the
Mississippi Society of CPA’s. He has also
completed the CBRE internal certification
requirements for a Lean Sigma Black belt.
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© 2013 CBRE Page 4
Learning Objectives
• Brief history of how we have arrived at the current state.
• Consensus opinion of where the FASB/IASB will end up on the new standard.
• What will the impacts to both the Income Statement and Balance Sheet be?
• What should companies be doing to prepare for the anticipated changes?
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© 2013 CBRE Page 5
Agenda
• History• Overview / Definitions• Anticipated Rules• Example
• What should everyone do now?
• Q & A
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© 2013 CBRE Page 6
Quick Survey
• How many would say that they are completely ready
to implement the new standard when
issued?
• How many would say that they have done a lot of research but have a good bit of work to do
once the standard is issued?
• How many have taken the approach that they will address it later, when (and if) it is finally
issued?
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© 2013 CBRE Page 7
Lease Project Objective
“Leases are an important source of financing for many companies that lease
assets.
However, many lease transactions currently are recognized off‐balance
sheet.
The objective of the leases project is to increase transparency and comparability
among organizations that lease assets by recognizing assets and liabilities that arise from lease transactions on a lessee’s balance
sheet.”
FASB.org
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© 2013 CBRE Page 8
Headlines
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© 2013 CBRE Page 9
Timeline
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ED 1 vs. ED 2
• All leases treated the same.
• Significant judgment in lease
terms but generally following
a “more‐likely‐than‐not”
approach to inclusion.
• Percentage Rent (including
forecast) included in PV.
• 2 type approach, with real
estate generally getting a
straight‐line approach.
• Lease options/ modifications
only included where there is
a “significant economic
incentive”.
• Percentage rent generally
excluded from payment
stream.
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© 2013 CBRE Page 11
Consistent Concepts!
• All leases (with some limited exceptions) will reside on the Balance Sheet.
• The initial Asset (Right of Use) and Liability will be computed at the PV of future leases payments.
• There will likely be NO bright‐line tests for the judgment decisions that are to be made,
however, examples will be presented for concept.
• There will be a need for periodic reassessment and support for decisions.
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© 2013 CBRE Page 12
Definition ‐
Lease
“A contract in which the right to use a specified asset is conveyed, for a
period of time, in exchange for consideration.”
• Keys to consider– Specified asset– Lease vs. non‐lease components– Receipt of benefit of use– Directing the use of the asset– Physically distinct portion vs. Capacity Portion.
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© 2013 CBRE Page 13
Definition – Lease (Cont.)
• Items not included as a lease for purposes of this standard.
– Leases for the right to explore for or use minerals, oil, natural gas and similar non‐ regenerative resources
– Leases of Intangibles– Leases of biological assets, including timber
– Leases of service concession arrangements
– Short term leases (less than 12 months.)
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© 2013 CBRE Page 14
Definition – Right of Use (RoU) Asset
A lessee will be required to recognize on their balance sheet
an asset representing its right to use the underlying asset
during the term and a liability representing its obligation to
make lease payments during the term, for most
arrangements that are or contain a lease.
• Keys to consider– The asset and liability are computed at the PV of rent payments
over the Term.
– Free Rent and concessions are included in the calculation.– Includes Initial Direct Costs.– Uses the Commencement Date rather than lease Inception Date.– Variable Lease Payments (VLP’s) included if in‐substance fixed
lease payments.
– Reassessment of RoU
Asset required if changes in VLP result from
changes in dependant index or rate.
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© 2013 CBRE Page 15
Definition – Term
“The lease term is the noncancellable
period for which the lessee had contracted with the lessor
to
lease the underlying asset, together with any options to extend or terminate the lease when
there is a significant economic incentive…..”
• Keys to consider– Noncancellable– Significant Economic Incentive– Reassessment of term only when there are significant changes in
relevant factors.
– Determination made based on “contract‐based, asset‐based and
entity‐based factors”
– Changes in Market Rates are NOT to be considered when
determining if there is a significant economic incentive.
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© 2013 CBRE Page 16
Definition –
Discount Rate
Generally “the Lessee would use the rate the Lessor charges lessee when that rate is available; otherwise,
the lessee would use its incremental borrowing rate.”
• Keys to consider– FASB considering a “risk‐free”
discount rate for non‐public
companies.
– Boards decided no reassessment of discount rate if
payments don’t change.
– Reassessment is necessary if payments change as a result of:• Change in assessment of economic incentive to exercise options,
or
• Actual exercise of option where we did not have a previous
assessment that the entity held an economic incentive to exercise.
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© 2013 CBRE Page 17
Lease Classification
• There are two classifications of leases for the lessee: 1) the Interest and Amortization
Approach and 2) the Single Lease Expense Approach.
• The determination of I&A (Type A) or SLE (Type B) treatment is based on … “whether
the lessee acquires and consumes more than an insignificant portion of the
underlying asset over the lease term.”
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© 2013 CBRE Page 18
Decision Tree
Compare the
Lease Term to
the economic
life of
underlying asset
and the PV of
fixed lease
payments to fair
value of the
underlying
asset.
Straight‐line
Expense
Accounting
A&I Expense
Accounting
A&I Expense
Accounting
Straight‐line
Expense
Accounting
Not
Insignificant
Insignificant
Not
Significant
Significant
The determination of which approach to use is made at lease commencement with
NO
reassessment required!
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© 2013 CBRE Page 19
Interest and Amortization TreatmentInterest and Amortization (I&A) Approach (Type A)
Assumptions‐
3 year lease‐
Quarterly rent payments made at the end of the quarter‐
Incremental Borrowing Rate 5%‐
Lease payments begin at $100,000 quarterly and increases by $10,000 in years 2 and 3‐
Lease is for Equipment and does NOT Qualify for Straight‐Line Expense Treatment
A B C D E FContractual
PaymentsEnd of period RoU
AssetEnd of Period Lease
Liability Interest ExpenseAmortization of
RoU Asset Total Expense
Established in Lease Initial Balance ‐
(E)Initial Balance + (D) ‐
(A) (C ) * 5% / 4 (G) / 12 Periods (D ) + (E)
Initial Balances (PV) 1,215,056 1,215,056 QTR 1 100,000 1,113,801 1,130,244 15,188 101,255 116,443 QTR 2 100,000 1,012,546 1,044,372 14,128 101,255 115,383 QTR 3 100,000 911,292 957,427 13,055 101,255 114,309 QTR 4 100,000 810,037 869,394 11,968 101,255 113,222 QTR 5 110,000 708,782 770,262 10,867 101,255 112,122 QTR 6 110,000 607,528 669,890 9,628 101,255 110,883 QTR 7 110,000 506,273 568,264 8,374 101,255 109,628 QTR 8 110,000 405,019 465,367 7,103 101,255 108,358 QTR 9 120,000 303,764 351,184 5,817 101,255 107,072 QTR 10 120,000 202,509 235,574 4,390 101,255 105,644 QTR 11 120,000 101,255 118,519 2,945 101,255 104,199 QTR 12 120,000 ‐ 0 1,481 101,255 102,736
1,320,000 104,944 1,215,056 1,320,000 G
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© 2013 CBRE Page 20
Single Lease TreatmentSingle Lease (SLE) Approach
Assumptions‐
3 year lease‐
Quarterly rent payments made at the end of the quarter‐
Incremental Borrowing Rate 5%‐
Lease payments begin at $100,000 quarterly and increases by $10,000 in years 2 and 3‐
Lease is for a Real Estate Asset and Qualifies for Straight‐Line Expense Treatment
A B C D E F
Contractual
PaymentsEnd of period RoU
AssetEnd of Period Lease
Liability SL Lease Expense Interest ExpenseAmortization of
ROU AssetEstablished in
Lease Initial Balance ‐
(F)Initial Balance + (E) ‐
(A) (G) /12 Periods (C ) * 5% / 4 (D ) ‐
(E)
Initial Balances (PV) 1,215,056 1,215,056 QTR 1 100,000 1,120,244 1,130,244 110,000 15,188 94,812 QTR 2 100,000 1,024,372 1,044,372 110,000 14,128 95,872 QTR 3 100,000 927,427 957,427 110,000 13,055 96,945 QTR 4 100,000 829,394 869,394 110,000 11,968 98,032 QTR 5 110,000 730,262 770,262 110,000 10,867 99,133 QTR 6 110,000 629,890 669,890 110,000 9,628 100,372 QTR 7 110,000 528,264 568,264 110,000 8,374 101,626 QTR 8 110,000 425,367 465,367 110,000 7,103 102,897 QTR 9 120,000 321,184 351,184 110,000 5,817 104,183 QTR 10 120,000 215,574 235,574 110,000 4,390 105,610 QTR 11 120,000 108,519 118,519 110,000 2,945 107,055 QTR 12 120,000 0 0 110,000 1,481 108,519
1,320,000 1,320,000 104,944 1,215,056 G
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© 2013 CBRE Page 21
Impact Graph
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© 2013 CBRE Page 22
Example EntriesPeriodic Entries for the SLE Approach
Inception of Lease Dr. RoU Asset 1,215,056$ Cr. Lease Liability 1,215,056$ (To establish the Asset and Liability)
Qtr 1 Dr. Lease Expense 15,188$ Cr. Lease Liability 15,188$ (Periodic Interest Calculation)
Qtr 1 Dr. Lease Expense 94,812$ Cr. Accumulated Amort of RoU Asset 94,812$ (Amortization of the RoU Asset)
Qtr 1 Dr. Lease Liability 100,000$ Cr. Cash 100,000$ (To Record the Lease Payment)
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© 2013 CBRE Page 23
Transition Considerations
• Existing Capital Leases – No adjustment to carrying amount.– Reclass
to lease liability and RoU
asset.
• Operating leases– Recognize lease liability at the beginning of the
earliest comparative period presented.– Lease Liability = PV of remaining lease payments.– RoU
asset computed under full‐retrospective
approach or modified retrospective.– Eliminate SL Cumulative Deferred.– Net Adjustment to Retained Earnings.
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© 2013 CBRE Page 24
Lessor
Summary Impacts
• 2 types of leases –
“Receivable and Residual Approach (R&R)”
and “Operating Lease Approach”
• Similar determining factors to Lessee. R&R approach, similar to A&I approach and involves
leases where lessee acquires more than an insignificant portion of underlying asset.
• Under R&R the Lessor
derecognizes the underlying asset.
• Same criteria used to reassess “significant economic incentive”
to exercise options.
• One significant difference in Lessor
accounting is the deferral of profit on the Net Residual Asset.
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© 2013 CBRE Page 25
Other Topics
• Sale and Leaseback Considerations
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© 2013 CBRE Page 26
What Should Companies Be Doing Now? 1 of 2
• Do you have access to all lease documents in an understandable form?
• Review the data elements being tracked on leases today.
• Identify the approval process changes that will be necessary in the new world.
• Develop a process for carving out Executory /Service Costs from the lease payments.
• Review of current Accounting and Lease Tracking tools to determine if they will be
prepared.
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© 2013 CBRE Page 27
What Should Companies Be Doing Now? 2 of 2
• Coordination with the auditors to make sure you are prepared for the required support.
• High‐level review of the impact of these changes on your financial statements.
• If these change will impact covenants / performance standards, communicate that
now.• MAKE YOUR PERSPECTIVE KNOWN TO THE
FASB / IASB, EVEN IF YOU AGREE WITH THE CURRENT PROPOSAL!
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© 2013 CBRE Page 28
Questions and Answers??
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© 2013 CBRE Page 29
Key Contacts at CBRE
• Nick Tansey
• Jeff Beatty [email protected]
