Lease Accounting Rev Rec Handout (PDF)

Presenters
Tara Schini, CPA, Partner
Matt Crane, CPA, Partner
Bob Hahn, CPA, Technical A&A Partner
Nathan Miller, CPA, Manager

May 31, 2017

www.boulaygroup.com
952.893.9320

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Today’s Agenda
• Opening remarks on the new revenue and lease
standards - Bob Hahn
• New lease accounting standard (ASU 2016-02) –
expect a big change – Matt Crane
• Revenue recognition disclosure related to new ASU
(2014-09) – Tara Schini

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Are You Ready for the New Rev Rec
• Revenue Recognition Standard (ASU 2014-09)
– Effective dates:
• Public – for periods beginning after December 15, 2017
(calendar 2018)
• Non-Public – for periods beginning after December 15, 2018
(calendar 2019)
– Transition (free choice election):
• Full retrospective or
• Modified retrospective Transition (free choice election):
• The lease standard is one year later

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Are You Ready for the New Rev Rec
• A poll of Fortune 500 companies at February 15, 2017,
45% of those companies could describe the status of it’s
effect when disclosing under “Recently Issued Accounting
Pronouncements”?
– Have you at least identified all revenue streams
– Talk to your auditors once you’ve feel you have
identified all revenue streams

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This Won’t Impact Me, So……….
• This won’t be just an accounting issue…….
– Even if the debits and credits don’t change much, the
disclosure requirements alone will be completely
different.
– That’s why Tara will cover this important area today.

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Are You Ready for the New Rev Rec
AICPA industry guides (as of May 20, 2017) - Available to all on AICPA Website

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Industry groups
Aerospace & defense
Airlines
Broker dealers
Construction contractors
Depository institutions
Gaming
Health care
Hospitality
Insurance
Investment companies
Not-for-profit
Power & utility
Software
Telecommunications

Issues identified Papers exposed Finalized
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10
9
15
14
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9
3
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2
1
16
12
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9
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3
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3
2
1
9
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2
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1
12
6
3
12
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1

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Leases - A Big Change
• Almost all companies have leases
• Almost all leases will go on the balance sheet
• Biggest challenge – Data!
– Lease data now is off-line in excel
– Now we have a disclosure only mentality
– Will soon be financial transaction monthly

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Leases - A Big Change
What if a lease is missed – say a storage space lease
• If missed now we would look at how the error effected
the disclosure (probably not an issue and no
restatement required).
• Future – what is the balance sheet effect? Is it material to:
• Total assets/liabilities
• Debt covenants
• Etc.
• A missing lease in the future could mean a restatement
– Get arms around all lease date
– Even embedded leases

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Lease Accounting Changes
Matt Crane, CPA
Partner
mcrane@boulaygroup.com | 952.841.3051

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Dispute Over Income Recognition
Lease Expense Pattern
160

140
120

Amount

100
80

60
40

20
0
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Payment
Cash Rent

Straight‐line Rent/Operating Lease

Capital Lease

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Overview
• Key changes affecting lessees:
– Requires most leases to be recorded on the balance
sheet (increase in assets and increase in debt)
– Expense pattern for leases is largely unchanged
– Provides new presentation and disclosure requirements

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Shift In Focus
• Current standard focuses on whether a lease was capital lease
(liability) or operating lease (commitment)
• New lease standard focuses on the Right to Use an Asset
• A contract is or contains a lease if it 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.

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Initial Criteria to Classify a Lease
– The lease transfers ownership of the underlying asset to the lessee by the end of
the lease term
– The lease grants the lessee an option to purchase the underlying asset that the
lessee is reasonably certain to exercise (bargain purchase option)
– The lease term is for the major part of the remaining economic life of the underlying
asset (Current std - Lease is greater than 75% of the life)
– The present value of lease payments and any residual value guaranteed 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 (Current std - PV of lease
payments is greater than 90% of the FMV)
– (New criterion) The underlying asset is of such a specialized nature that it is
expected to have no alternative use to the lessor at the end of the lease term

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Lease Classification
• Lessees:
– A lease that does not meet any of the criteria is an operating lease
– A lease that meets any of the criteria is a finance lease
– Short-term lease exemption:
• Lease term of 12 months or less and no purchase option that the lessee is
reasonably certain to exercise
• Account policy election, by class of underlying asset
• Do not recognize lease assets or liabilities

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Operating Lease Measurement
• Recognition of Right to Use Asset and Lease Liability at the present value of the
lease payments
• Discount rate is rate included in the lease. If none, the incremental borrowing rate.
– For private companies, policy election can be made to use the risk-free rate

• Straight-line expense recognition with deferred rent, if necessary
• Relieving of Right to Use Asset and Lease Liability based on the amortization of the
Lease Liability
• Asset reduction is not straight-line

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Lessee Accounting – Recognition
Finance lease

Operating lease

Initial recognition and 
measurement

Initially measure the right of use (ROU) asset and lease liability at the 
present value of the lease payments not yet paid

Subsequent measurement – lease 
liability

Increase the lease liability based on 
the interest method using the 
discount rate determined at lease 
commencement and reduce the 
lease liability by the payments 
made

Measure the lease liability at the 
present value of remaining lease 
payments using a discount rate 
determined at lease 
commencement

Subsequent measurement – ROU 
asset

Amortize the ROU asset, generally 
on a straight‐line basis over shorter 
of lease term or useful life of ROU 
asset and record any impairment of 
the ROU asset

Measure ROU asset at amount of 
lease liability and adjust for 
cumulative prepaid or accrued 
rents (i.e., uneven rent payments), 
any lease incentives received, 
lessee initial direct costs and any 
impairment of the ROU asset

Income statement effect

Generally “front‐loaded” expense

Generally straight‐line expense

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Lessee Accounting - Presentation
ROU asset

Lease liability

‐ Lease ROU assets can be presented 
separately or together with other 
assets
‐ If not presented separately, disclose 
the line where they are presented and 
the amount of lease ROU assets
‐ Finance lease ROU assets are 
prohibited from being presented in the 
same line as operating lease ROU 
assets

‐Lease liabilities can be presented 
separately or together with other 
liabilities
‐If not presented separately, disclose the 
line item where they are presented and 
the amount of lease liabilities
‐Finance lease liabilities are prohibited 
from being presented in the same line 
item as operating lease liabilities 

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