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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
HELPING YOU GET THERE
5/30/2017
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
1
HELPING YOU GET THERE
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
2
HELPING YOU GET THERE
1
5/30/2017
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
3
HELPING YOU GET THERE
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.
4
HELPING YOU GET THERE
2
5/30/2017
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
12
10
9
15
14
6
9
9
3
9
8
3
2
1
16
12
4
9
7
3
7
4
3
2
1
9
4
2
4
3
3
11
1
12
6
3
12
5
1
5
HELPING YOU GET THERE
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
6
HELPING YOU GET THERE
3
5/30/2017
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
7
HELPING YOU GET THERE
Lease Accounting Changes
Matt Crane, CPA
Partner
mcrane@boulaygroup.com | 952.841.3051
8 THERE
HELPING YOU GET
4
5/30/2017
Dispute Over Income Recognition
Lease Expense Pattern
160
140
120
Amount
100
80
60
40
20
0
1
2
3
4
5
6
7
8
9
10
11
12
13
14
Payment
Cash Rent
Straight‐line Rent/Operating Lease
Capital Lease
HELPING YOU GET THERE
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
HELPING YOU GET THERE
5
5/30/2017
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.
HELPING YOU GET THERE
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
HELPING YOU GET THERE
6
5/30/2017
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
HELPING YOU GET THERE
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
HELPING YOU GET THERE
7
5/30/2017
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
HELPING YOU GET THERE
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
HELPING YOU GET THERE
8
Lease Accounting Rev Rec Handout.pdf (PDF, 11.02 MB)
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