Webinar: HOW TO TACKLE ASC 842 IMPLEMENTATION · impairment of the entity’s right-of-use assets. This practical expedient may be elected separately or in conjunction with either

Webinar:

HOW TO TACKLE

ASC 842 IMPLEMENTATION

Lease Accounting Implementation

Lessons from the Front Lines

Page 1© 2019 LeaseAccelerator Inc.

Webinar Logistics

• Video Replay Slides Will Be Available for Download

on Website

• Q & A Session Following Presentation.

• Ask Questions any time in the ON24 Panel (Lower

Right).

• Technical Difficulties? Visit:

www.leaseaccelerator.com/webinar-technical-

support

• No CPE Credit will be Offered


Meet Today’s Presenters

Richard MelzerVice President

William AndreoniSenior Director

Jim SwanickManaging Director

How to Tackle ASC 842

ImplementationLease Accounting Lessons from the Front Lines March 26, 2019

Contents

– Overview of the New Lease Standard

– Data Gathering Challenges

– Overall Implementation Process Review

– Implementation Challenges and Unforeseen Issues

– Technology Considerations

– Example Lessee Walkthrough

– Tax Implications When Adopting

How Did We Get Here…..

Implementing the New Standard

Lessee

✓ Record and disclose a lease right-of-

use (ROU) asset for all leases

✓ Record and disclose a lease liability for

all leases

✓ Indirect Cost(s)

✓ New Policies, procedures, and controls

✓ Technology Impact

✓ New Quantitative and Qualitative

Disclosures

Lessor

✓ Largely unchanged from legacy GAAP

✓ New ASC 842 rules better align with ASC 606

(Rev Rec)

✓ No differences between lease of real-estate vs

other leases

✓ Improved consistency in terms used in guidance

for lessee and lessor

✓ Leveraged lease classification not retained for

leases that commence after effective date of

ASC 842

✓ Possible deferral of upfront revenue/profit if

control definition is not met

✓ Indirect Cost(s)

What happened?

ASC 842 is effective for annual periods

beginning after December 15, 2018

(public business and certain other

entities) and after December 15, 2019

for other entities. Early adoption is

permitted.

Other changes include:

• How you identify a lease that is

covered by ASC 842 (embedded

leases)

• Classifying a lease (no more bright

lines)

• Expanded disclosures on leases

Roadmap

Overall Implementation Process Overview

Our Model Four Phased Approach

✓ Monitor Guidance Updates

and implement accordingly

✓ Reassess lease vs buy

decision criteria

✓ Manage any significant

delta in lease agreements

and/or data (i.e. determine

if additional testing

required)

✓ On-going audit review

(internal and external)

✓ On-going trainings

Phase 4Ongoing

✓ Document and adopt new

data, process, policies,

systems, and control updates

✓ Calculate and process new

lease entries (e.g. ROU

asset, Lease Liability, etc.).

✓ Conduct mock exercises

and/or parallel exercises to

ensure proper implementation

✓ Formalize training for

departments and team

members impacted by

updates

✓ Implement required financial

reporting disclosures

Phase 3Implementation

✓ Evaluate lease contracts under

new guidance (i.e.

classification, lease vs non-

lease, etc.)

✓ Evaluate unique lease

transactions (e.g. sale

leasebacks, etc.) under new

guidance

✓ Design data, process, and

disclosures for financial

statements

✓ Determine updates: Policies

and Procedures, Systems, and

Controls

✓ Confirm final design with all

relevant project stakeholders

Phase 2Design/Evaluation

✓ Establish project plan and cross-

functional team (and steering

committee)

✓ Identify lease agreements

✓ Identify current Policies and

Procedures

✓ Identify and evaluate current

technology capabilities and

assimilate a solution (update

current framework vs acquire

new)

✓ Identify data requirements for

footnotes

✓ Confirm approach with auditors

Phase 1Discovery

Data Gathering Issues

Observations from the transition period

Implementing the new Standard

Lease Evaluation Process

How do we get there….

9

✓ Current project focus is on identifying all leases

✓ Standard leases including sub-leases (buildings, equipment, furniture etc.)

✓ Embedded leases (service contracts, supply agreements, contract manufacturing agreements)

✓ Nature of Leases

✓ Significant Assumptions

and judgements

✓ Policy elections

✓ Various other

Disclose

Identify

✓ Identified Asset

✓ Substantially all

economic benefits

✓ Control of Asset

Classify

✓ Finance Lease

✓ Operating Lease

✓ Right of Use Asset

✓ Lease Liability

Measure✓ BS – ROU Asset and Lease

Liability

✓ IS – Front loaded finance

lease vs straight-line

operating

✓ CF – Operating vs Finance

Recognize

Key Objective of Phase 1: Identify a complete population of leases.

The Company’s methodology in achieving this objective is:

✓ Identify all of the Company’s physical locations

✓ Identify appropriate individuals responsible for overseeing each physical location and understand

the lease activity at or around each physical location

✓ Obtain and review a reciprocal population to identify potential leases (e.g. vendor listing and/or

expense detail)

✓ Compile lease confirmations and information by department/location (standard and embedded

leases) Explicit leases (confirmation form process)

✓ Embedded leases (supply chain and information technology)

✓ Perform reconciliation between:

✓ Lease information from confirmation process, and;

✓ Lease information disclosed in financial statements

Where do we start….

How is Company Going to Comply with New Standard?

The new ASC 842 standard applies to leases of property, plant and equipment.

The guidance does not apply to the following:

✓ Leases of intangible assets (ASC 350)

✓ Leases to explore for or use minerals, oil, natural gas and similar non-regenerative resources,

including the intangible rights to explore for those natural resources and rights to use the land

in which those natural resources are contained (unless those rights of use include more than

the right to explore for resources)

✓ Leases of equipment used to explore for natural resources are not part of this scope

exception

(i.e., they are in scope of ASC 842)

✓ Leases of biological assets, including timber

✓ Leases of inventory

✓ Leases of assets under construction

✓ Arrangements within the scope of ASC 853 - Service Concession Arrangements

Leasing Guidance Overview: Scope Exceptions

Leasing Guidance Overview: Practical Expedients

Practical expedient:

Hindsight

Practical expedient:

Package (identification,

classification and initial

direct cost):

Accounting Policy:

Portfolio approach

Accounting Policy:

Lease vs. non-lease

components

(Lessee)

Accounting Policy:

Short-term lease

An entity may elect the

following practical

expedients, which must be

elected as a package and

applied consistently by an

entity to all of its leases

(including those for which

the entity is a lessee or a

lessor), when applying the

pending content that links

to this paragraph to leases

that commenced before the

effective date:

1. An entity need not

reassess whether any

expired or existing

contracts are or contain

leases.


reassess the lease

classification for any

expired or existing

leases.


reassess initial direct

costs for any existing

leases.

An entity also may elect a

practical expedient, which

must be applied consistently

by an entity to all of its leases

(including those for which the

entity is a lessee or a lessor)

to use hindsight in

determining the lease term

(that is, when considering

lessee options to extend or

terminate the lease and to

purchase the underlying

asset) and in assessing

impairment of the entity’s

right-of-use assets. This

practical expedient may be

elected separately or in

conjunction with either one or

both of the practical

expedients in (f) and (gg).

As a practical expedient, a

lessee may, as an

accounting policy election

by class of underlying

asset, choose not to

separate non-lease

components from lease

components and instead to

account for each separate

lease component and the

non-lease components

associated with that lease

component as a single

lease component.

The Board decided to

explicitly state that lessees

and lessors are permitted

to apply the leases

guidance at a portfolio

level. The cost relief also

could be particularly high

for certain aspects of the

leases guidance for which

entities need to make

judgments and estimates,

such as determining the

discount rate or

determining and

reassessing the lease term.

For example, rather than

establishing a specific

discount rate for a single

leased asset, an entity

might conclude that it can

establish a single discount

rate applied to all leases in

a portfolio because using

that discount rate would not

result in a materially

different answer than using

a discount rate determined

for each.

As an accounting policy, a

lessee may elect not to apply

the recognition requirements

in this Subtopic to short-term

leases. Instead, a lessee may

recognize the lease payments

in profit or loss on a straight-

line basis over the lease term

and variable lease payments

in the period in which the

obligation for those payments

is incurred (consistent with

paragraphs 842-20-55-1

through 55-2). The accounting

policy election for short-term

leases shall be made by class

of underlying asset to which

the right of use relates

Where are the issues….

How is the Company going to Ensure Completeness?

Key Risk: A complete population of leases is not properly identified during the lease gathering

phase, yielding an incorrect transition adjustment and disclosures

Lessee Considerations

✓ Checks and Recs to technology platform, etc.

✓ Data analytics and metrics for reasonableness

✓ Lessor Considerations

✓ Understand and evaluate procedures performed during implementation of ASC 606 –

Revenue from Contracts with Customers

✓ Survey Key Individuals to confirm assessment results

Financials GL SearchInternal

Certifications

Lease

Completeness

Lessons Learned

Implementation Pitfalls and Unforeseen Issues

Lessons Learned

…..while Implementing New Standards

All

departments

may be

impacted!

Technology

is Critical

Evaluation

is on-going,

not a point in

time

Interpretations

will vary, even

within audit

firms

No one is an

expert

Project planning

& milestones

Dedicated team to

implement

Document,

Document,

Document!

Meeting with

auditors should be

“early and

frequent”

❖ Not Just a Compliance Project✓ Lease standard compliance

promotes a variety of valuable by

projects

✓ Compliance

✓ Operational Optimizations

❖ New GAAP Exposed Old Errors✓ Accounting

✓ Control Environment

✓ Technology

✓ Financial Reporting

❖ Valuable By-products✓ Improved Communication (Push and

Pull)

✓ Accounting


✓ Financial Reporting

Lessons Learned:

New Lease Standard

Incremental Borrowing Rate

Leasing Guidance Overview

17

ASC 842 Defines IBR as follows:

“The rate of interest that a lessee would have to pay to

borrow on a collateralized basis over a similar term an

amount equal to the lease payments in a similar

economic environment.”

Incremental Borrowing Rate

Leasing Guidance Overview

18

✓ At lease commencement, a lessee measures the lease liability at the present value of the lease payments not yet paid using the discount rate for the lease

✓ The discount rate used in the present value calculation should be the “rate implicit in the lease” whenever that rate is readily determinable

✓ If it is not readily determinable, which we expect to be the case in most instances, lessees use the incremental borrowing rate (IBR)

✓ Non-public business entities may elect to use a risk-free rate

✓ The discount rate should be determined on a lease-by-lease basis

** The rate must be reassessed if there is a change to the lease term or the assessment of whether the lessee is reasonably certain to exercise a purchase option, or if a modification occurs and it is not accounted for as a separate contract

A business may be impacted in the following areas:

✓ Debt Covenant Compliance

✓ Financial Statements Ratios

✓ Lease vs Buy Decisions

✓ Market Capitalization

✓ Credit Agency Ratings

The what….

Leasing - Business Impact from New Standard

✓ Real Estate – Rent vs Own Decisions

✓ Capital Requirements


✓ Accuracy of Prior Reporting

✓ New Financial Reporting Disclosures

The what…..

New Lease Standard: Valuable Byproducts

Implementing the new lease standard can promote the following:

✓ Centralizing Lease Activity

✓ Lease vs Buying Decisions

✓ Competitive Financing

✓ Contract Negotiation Approach

✓ Lease contract T&C’s

** Opportunity to centralize and optimize through technology (during

adoption and post adoption)

✓Opportunities for MSA’s

✓Management of Evergreen Fees

✓Buyouts vs Renewals

✓Better tracking of Leased Assets

✓Physical location

Technology Considerations

System Impact and Considerations from New Standard

Companies will need to consider the following:

– Lease Types and Volume

– Structured and Unstructured Data

– Book vs Tax Differences

– Move away from Excel

– Nothing is 100% “out of the box”

– Plan for upgrades and maintenance

Volume UnstructuredComplexity High Risk of

Misstatement

– System Development Life Cycle

– IT should serve on Steering Committee

– Business and Technical Requirements (Use

Cases)

– Existing ERP System vs New Bolt On System

– Technology Vendor Analysis

23www.leaseaccelerator.com

ENTERPRISE LEASE ACCOUNTING

Comply with the new lease accounting

standards while also establishing a scalable

model for managing your lease portfolio.

SOLUTIONS FOR FINANCE AND ACCOUNTING

THE CONTROLLER’S

CHALLENGE


The Controller’s Challenge

Creating an accurate, repeatable, global close process...



Started as an

Accounting

Problem




Became a Data

Problem




Now a Process

Transformation

Problem


28www.leaseaccelerator.com

ENTERPRISE LEASE ACCOUNTING

Comply with the new lease accounting

standards while also establishing a scalable

model for managing your lease portfolio.

SOLUTIONS FOR FINANCE AND ACCOUNTING

UNDERSTANDING

THE JOURNEY


The Lease Accounting Journey

WE ARE

HERE

DAY

ONE

• Future State Design

• Data Collection & Cleansing

• Software Configuration & Testing

• Communications & Training

DAY

TWO

DAY

THREE

1

2

3

FINISH LINE

1/1/2019



WE

ARE

HERE

STARTING LINE

DAY

ONE





DAY

TWO

• New Leases & End of Term

• Modifications & Reassessments

• Monthly Close & Quarterly Reports

• Substantive & Process Audit Preparation

DAY

THREE

• Competitive Sourcing of Financing

• Lease versus Buy Analysis

• End of Term and Evergreen Management

• KPIs & Stakeholder Scorecards

1

2

3

FINISH LINE

1/1/2019


Decisions and Events Across the Lifecycle



WE

ARE

HERE

STARTING LINE

DAY

ONE





DAY

TWO





DAY

THREE





1

2

3

FINISH LINE

1/1/2019

The greatest risk and cost is here…


WE

ARE

HERE


STARTING LINE

DAY

ONE





DAY

TWO





DAY

THREE





1

2

3

FINISH LINE

1/1/2019

The greatest risk and cost is here…

…not here.



WE

ARE

HERE

STARTING LINE

DAY

ONE





DAY

TWO





DAY

THREE





1

2

3

FINISH LINE

1/1/2019

Leverage Technology to

Reduce RISK


WE

ARE

HERE


STARTING LINE

DAY

ONE





DAY

TWO





DAY

THREE





1

2

3

FINISH LINE

1/1/2019

Leverage Leasing

to Drive Savings



WE

ARE

HERE

STARTING LINE

DAY

ONE





DAY

TWO





DAY

THREE





1

2

3

FINISH LINE

1/1/2019

Compliance Driven

ROI

L E A D ING TA X D E PA RT MEN TS F O RWA RD

Tax Implications of ASC 842 Adoption

Jim Swanick

Managing Director

What We Wil l Cover

►Action Plan

►Lease Classification for Tax

►Accounting Methods

►Deferred Taxes for New Basis Differences

© Global Tax Management, Inc. | www.gtmtax.com 38


INFORMATION GATHERING ANALYSIS OF TAX ISSUES IMPLEMENTATION

❑ Coordination with the

accounting team

❑ ROU assets and lease

liabilities recorded

❑ Understand book vs tax

treatment of IDCs

❑ Understand book vs tax

treatment of income/

expense recognition

❑ Confirm tax classification

of leases

❑ Confirm tax accounting

methods for recognizing

income or expense

❑ Determine book vs tax

basis differences for ASC

740 purposes

❑ Record deferred taxes

❑ Accounting method

changes, if needed

❑ Establish processes,

controls, maintenance,

❑ Other – state

apportionment, franchise

taxes, sales taxes,

foreign locations, etc.

TACKLING THE TAX IMPLICATIONS

ASC 842 ACTION PLAN FOR TAX


LEASE CLASSIFICATION – TRUE LEASE VS SALE

True Lease Sale

Lessee Deduct Rent Payments Tax Depreciation

Interest Expense

Lessor Rent Income Gain on Sale

Tax Depreciation Interest Income



► A true lease exists if, based on the facts and circumstances, the lessor bears the risks and

rewards of ownership of the asset.

► Common factors which may indicate a sale rather than a lease:

» The lease contract contains a bargain purchase option

» The lease term covers a large part of the useful life

» There is nominal residual value at the end of the lease

» The agreement applies payments toward an equity interest

» You get title to the property after a certain # of payments

» Total payments are comparable to the purchase price

» You pay much more than the fair rental value

» The agreement designates part of the payments as interest



► IRS guidance:

» Rev. Rul. 55-540

» Rev. Proc. 75-21

» Rev. Proc. 2001-28

►Key court cases:

» Frank Lyon Co. v. United States, 435 U.S. 561 (1978)

» Grodt & McKay Realty, Inc. v. Commissioner, 77 T.C. 1221 (1981)

» Estate of Thomas v. Commissioner, 84 T.C. 412 (1985)

» Torres v. Commissioner, 88 T.C. 702 (1987)



►A true lease exists if, based on the facts and circumstances, the lessor

bears the risks and rewards incident to ownership of the asset.

► IRS guidance:

» Rev. Rul. 55-540

» Rev. Proc. 75-21

» Rev. Proc. 2001-28

►Key court cases:

» Frank Lyon Co. v. United States, 435 U.S. 561 (1978)

» Grodt & McKay Realty, Inc. v. Commissioner, 77 T.C. 1221 (1981)

» Estate of Thomas v. Commissioner, 84 T.C. 412 (1985)

» Torres v. Commissioner, 88 T.C. 702 (1987)



► Common factors which may indicate the contract is a sales contract

rather than a lease:

» The agreement applies payments toward an equity interest

» You get title to the property after a stated amount of payments

» Total payments are comparable to the purchase price

» You pay much more than the fair rental value of the property

» You have an option to buy the property at a nominal price

compared to the projected value of the property at the option

exercise date (e.g., bargain purchase option)

» The agreement designates part of the payments as interest

» The lease term covers a large part of the useful life of the asset

» The lessee has risk of loss

45

DEFERRED TAX ACCOUNTING

►Book versus Tax basis

» Under ASC 740, the establishment of a new right-of-use asset and related lease liability may cause a deferred tax asset (DTA) or deferred tax liability (DTL) to be recorded to the extent there is a different tax basis for such amounts

© Global Tax Management, Inc. | www.gtmtax.com


EXAMPLE 1 – TRUE LEASE FOR TAX / OPERATING LEASE

FOR BOOKS - NEW RULES (NO RENT INCREASES)

Payments

Book lease

liab.

(1-6)

Book ROU

(3-4)

Book

Amort Exp

(5-6)

Book Rent

Expense

(S/L)

Book Int

Exp

Tax Rent

Exp plus

amort of

costs

Bk/Tx

timing diff

(5-7)

Temp diff

Lease Liab

Temp Diff

ROU asset

Net Temp

Diff

1 2 3 4 5 6 7 8 9 10 11

0 15,000 (392,017) 407,017 392,017 (392,017) -

1 50,000 (362,094) 375,594 31,424 51,500 20,076 51,500 - 362,094 (362,094) -

2 50,000 (330,413) 342,413 33,180 51,500 18,320 51,500 - 330,413 (330,413) -

3 50,000 (296,874) 307,374 35,040 51,500 16,460 51,500 - 296,874 (296,874) -

4 50,000 (261,365) 270,365 37,009 51,500 14,491 51,500 - 261,365 (261,365) -

5 50,000 (223,772) 231,272 39,093 51,500 12,407 51,500 - 223,772 (223,772) -

6 50,000 (183,973) 189,973 41,300 51,500 10,200 51,500 - 183,973 (183,973) -

7 50,000 (141,837) 146,337 43,636 51,500 7,864 51,500 - 141,837 (141,837) -

8 50,000 (97,228) 100,228 46,109 51,500 5,391 51,500 - 97,228 (97,228) -

9 50,000 (50,000) 51,500 48,728 51,500 2,772 51,500 - 50,000 (50,000) -

10 50,000 (0) 0 51,500 51,500 0 51,500 - 0 (0) (0)

-

515,000 407,017 515,000 107,983 515,000


EXAMPLE 2 – TRUE LEASE FOR TAX / OPERATING LEASE

FOR BOOKS - NEW RULES (3% INCREASE PER YEAR)

Payments

Book lease

liab.

(1-6)

Book ROU

(3-4)

Book

Amort Exp

(5-6)

Book Rent

Expense

(S/L)

Book Int

Exp

Tax Rent

Exp plus

amort of

costs

Bk/Tx

timing diff

(5-7)

Temp diff

Lease Liab

Temp Diff

ROU asset

Net Temp

Diff

1 2 3 4 5 6 7 8 9 10 11

0 15,000 (443,212) 458,212 443,212 (443,212) -

1 50,000 (416,294) 422,474 35,738 58,819 23,082 51,500 7,319 416,294 (408,974) 7,319

2 51,500 (386,207) 385,068 37,406 58,819 21,413 53,000 5,819 386,207 (373,068) 13,139

3 53,045 (352,719) 345,806 39,263 58,819 19,557 54,545 4,274 352,719 (335,306) 17,413

4 54,636 (315,580) 304,484 41,322 58,819 17,497 56,136 2,683 315,580 (295,484) 20,096

5 56,275 (274,526) 260,885 43,598 58,819 15,221 57,775 1,044 274,526 (253,385) 21,140

6 57,964 (229,274) 214,778 46,107 58,819 12,712 59,464 (644) 229,274 (208,778) 20,496

7 59,703 (179,525) 165,913 48,866 58,819 9,954 61,203 (2,383) 179,525 (161,413) 18,113

8 61,494 (124,960) 114,022 51,891 58,819 6,928 62,994 (4,174) 124,960 (111,022) 13,938

9 63,339 (65,239) 58,819 55,202 58,819 3,617 64,839 (6,019) 65,239 (57,319) 7,919

10 65,239 (0) 0 58,819 58,819 0 66,739 (7,919) 0 (0) (0)

-

588,194 458,212 588,194 129,982 588,194


TAX ACCOUNTING METHODS

► Accounting method changes

» As part of adoption process, additional information may become available which could result in identification of improper accounting methods for tax purposes

► Rev. Proc. 2018-31 - automatic change for lease classification

» Change made using a cut-off method and thus only applies to transactions entered into on or after the beginning of the year of change. Thus, no section 481(a) adj required.

► Rev. Proc. 2015-13 – non-automatic change for lease classification

» Leases entered into before the beginning of the year of change.

» Such request will not be considered unless the proposed method of accounting is consistent with the method used by the counterparty to the lease agreement.

» No audit protection is provided for this nonautomatic method change.


Questions

William AndreoniSenior Director

Pine Hill Group

[email protected]

Jim SwanickManaging Director

GTM

[email protected]

Richard MelzerVice President

LeaseAccelerator

[email protected]

mailto:[email protected]



THANK YOU!

For more information, visit:

www.leaseaccelerator.com | www.Pinehill.com | www.gtmtax.com

Documents

Webinar: HOW TO TACKLE ASC 842 IMPLEMENTATION · impairment of the entity’s right-of-use assets. This practical expedient may be elected separately or in conjunction with either