ASC 842 - Leases – the new standard is ready,... Accounting changes Industry considerations

ASC 842 - Leases – the new standard is ready, are you?
Accounting changes
Industry considerations
Balance sheet:
• Virtually all leases will be reflected on balance sheet
• Policy election for short term leases (<12 months)
• Asset and obligation (similar to capital leases)
• On-balance sheet treatment for embedded leases regardless of classification
P&L:
• Dual recognition model
• Interest & amortization vs. lease expense, depending on lease classification
Other:
• No specific guidance regarding lessee involvement in asset construction (“build to suit”)
• Include renewal/extension/purchase options if it is “reasonably certain” that the lessee will
exercise the option
• Include index- or rate-based payments and in-substance fixed lease payments
• Application of ASC 606 for sale leaseback transactions
• Separate lease and non-lease components based on observable standalone price, unless an
accounting policy election is made not to separate them
• Enhanced qualitative and quantitative disclosures required
•
Identifying and separating non-lease components
•
Definition of a lease – other arrangements that could qualify as leases (e.g., capacity contracts,
wayleaves and rights of access, satellite broadcasting contracts, fiber optic wired line, IT
outsourcing agreements, and set-top boxes)
What actions should companies take
and when?
2016
FASB
2017
2018
- Transition relief (noted below) may impact lease determinations at transition
Transition for historical failed sale-leaseback arrangements (e.g., financings)
•
Treatment of deferred gain balances from historical sale-leaseback arrangements at transition
•
Lease-out lease-in (“LOLI”) transaction considerations
•
Volume of leases, both from a lessee and a lessor perspective
•
Likely more required bifurcations of leases between land and towers
Transition
2019
Effective
Date
Final
Standard (Q1)
•
Company Assess:
Actions
Assess the Impact
Convert:
Conduct Financial Modeling
Embed:
Update Systems
& Processes
Cross-functional impact
Modified retrospective approach required
•
Applies only to leases existing at, or entered into after,
earliest comparative period (the date of initial application)
•
Hindsight allowed - exercise of lease renewals and
purchase options
•
Transition disclosures in accordance with ASC 250
•
Transition reliefs (must be elected as a package)
-
No required reassessment whether contracts are or
contain leases
-
No required reassessment of lease classification
-
No required reassessment of initial direct costs (i.e.,
whether costs would have qualified for capitalization
under new lease standard)
Accounting
Policy &
Tax
Financial
Statement/
Key Metrics
Systems &
Data
Challenges
Budget/
Forecasting
Process/
Controls
Lease vs.
Buy
What should companies be doing next?
Assess
Embed
Convert
Accounting & disclosure (scoping, training, policy, transition, technical advice, disclosures)
Key Activities
Impact analysis
Data assessment and lease analysis
•
Establish cross-functional implementation team
•
System and process implementation
•
Evaluate lease portfolio strategy
-
Collect leases
•
Controls integration and establishment
•
Identify which contracts are leases or have embedded
leases
-
Source identification and mapping
•
Controls testing and validation
-
Abstraction and aggregation
•
Data migration
•
Data
Systems, process, and controls
•
Conduct education sessions and workshops
-
Convert and collect new data elements
•
User acceptance testing, data validation approvals, etc.
•
Complete end-to-end process review and gap analysis
-
Reconciliation and quality assessment
•
Post implementation reviews
•
Consider alternatives for future lease negotiations
-
Quality remediation and enhancement
•
Sustain and support ongoing solution(s)
•
Consider cross functional impacts (e.g., covenants, tax,
compensation plans)
-
Master data management
•
Determine impacts on process and controls
•
Evaluate policy and transition alternatives
•
Identify IT gaps and determine technology strategy
•
Formalize budget and roadmap for implementation
•
Develop communications (impacts and plan)
•
Reporting & analytics
•
Consideration of lease/buy processes and strategies
•
Change management/training
•
Lease process design & transformation
Project management bridging functional areas (accounting & reporting, FP&A, treasury, procurement, real estate, etc.)
How PwC Can Help…Our Project Enabling Tools Bringing Value to You
Diagnostic
Surveys
Project
Plans
Data Abstraction
Rules
Reporting,
Analytics and
Modeling
To have a deeper discussion about our point of view on lease accounting,
please contact:
Sheri Wyatt
Managing Director, Deals
Accounting Advisory Services
Tel: +1 (312) 298 2425
[email protected]
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