How To Get Started With Your Lease Accounting Project

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How to Get Started with YourLease Accounting ProjectA Finance Executive’sGuide to the First 90 Days

2How to Get Started with Your Lease Accounting ProjectPURPOSE OF THIS GUIDEThis guide is intended to help CFOs, Chief Accounting Officers,Controllers and other financial executives devise a strategy forimplementing the new lease accounting standards. In thisguide we will help you navigate the first 90 days of your project.DestinationFirst, we will help you to assess the situation by answeringquestions such as: What are the top issues and risks? What do we lease today? What policies, controls and systems exist? What is the current accounting process?Then we will turn to towards getting the project started byhelping you to answer questions such as: Who should be on the project team? How long will the project take? How much will the project cost?After completing the six-phases outlined in this guide, youshould be in a position to secure budget and get started withthe implementation of the new standards.OriginNote: This guide is not intended to provide a technicalaccounting overview of FASB and IFRS standards. Instead, thefocus of this guide is how to implement the standards.However, we will discuss a few of the issues with the standardsthat most impact the implementation ator.com1- ‐866- ‐446- ‐0980

3How to Get Started with Your Lease Accounting ProjectROADMAP: THE FIRST 90 DAYS1)  Understand  theNew  Rules2)  SituationalAssessment12Understand the new leaseaccounting standards.What are the risks to yourbusiness?33)  Staff  theProject  TeamIdentify an executivesponsor and projectmanager. Assign a crossfunctional team.6)  Define  Budget  &Timeframes4)  Evaluate  YourLeasing  ProgramAssess the maturity ofyour current leasingprogram. What systems,processes, controls are inplace?465What budget will be neededfor lease accountingsoftware? How much will itcost for outside consultantsto help you [email protected] a readinessassessment. Understandthe implementationchallenges and risks.5)  Define  ProjectScope  &  StrategyWill this be a strategic ortactical project? Will youmodel your leasingprogram to be best-inclass or just to comply?www.leaseaccelerator.com1- ‐866- ‐446- ‐0980

PHASE 1UNDERSTAND THE NEW RULES

5How to Get Started with Your Lease Accounting ProjectLEASES MOVE ONTO THE BALANCESHEETThe end goal of the new lease accountingstandards is to provide investors with moretransparency around your leasing contracts.Operating leases, which have historically been offbalance sheet will now be treated as assets andliabilities on the balance sheet under both US GAAPand IFRS. Operating leases represent the majorityof leases for 93% of companies.1The challenges with these new standards shouldnot be underestimated. In fact, some have calledthe new leasing standards the “biggest accountingchange ever.” The International AccountingStandards Board estimates that over 2 Trillion inliabilities will move onto corporate balance sheetsduring this transition.While most of the dollar value of these leases isassociated with real estate, many companies willhave a larger number of leases for non-real estateassets such as vehicles, IT and equipment.Example Balance SheetAssetsIAS  17IFRS ,703Total  non- current  assets72,18289,981110,  268128,06722,53322,533Lease  liabilities69721,233Other  liabilities57,71457,264Total  liabilities80,944101,030Equity29,32427,037Total  liabilities  andequity110,268128.067Property,  Plant  &EquipmentLease  AssetsTotal  assetsBorrowingsSource:  International  Accounting  Standards  Board:IFRS  16  Effects  Analysis  (January  2016)1)  KPMG  – The  Great  Accounting  Challenge  (May tor.com1- ‐866- ‐446- ‐0980

6How to Get Started with Your Lease Accounting ProjectTHE BIG PICTURE - ISSUES AND RISKSImpact on Financial Reporting1.2501.408.23.210080604020 40095606040 30 30 5040 4020 2070 6040 50 40 4012:00For many Fortune 500 companies, several hundred million (if nota few billion dollars) worth of leases will transition onto yourbalance sheets as a result of the new lease accounting rules.CFOs need to consider: What will be the impact to your market capitalization andshare price? How will you communicate these changes toinvestors? Will the changes to your balance sheet impact existing debtcovenants and borrowing ability? How will ratings agenciesrespond? How will financial metrics such as EBITDA and Return onAssets be impacted? Are changes needed to executivecompensation and performance plans?Administrative Reporting BurdenHow much effort will be required to comply with the new accounting rules? Isthis another Sarbanes-Oxley-like burden that will create massiveadministrative burdens for the accounting departments of big companies?Or will it just be a few months’ worth of work for the accountants and celerator.com1- ‐866- ‐446- ‐0980

7How to Get Started with Your Lease Accounting ProjectIMPLEMENTATIONTIME FRAMEThe SEC has defined implementation deadlines for thenew lease accounting standards which vary based uponyour fiscal year and the private/public nature of yourownership. The earliest implementation deadlines forDecember 31st filers are for public companies with afiscal year of 2019. Deadlines for private companies areone year later.However, the official deadlines are a bit misleading.The SEC is also requiring comparative reporting – threeyears of income statements and two years for balancesheets. As a result, you likely need to start trackingmore data about operating leases well in advance ofthe official deadline. For some companies, as early as,January 2017.To implement the new standards you will need to:1) Take an inventory of all your leases2) Gather key data about each lease3) Apply the new accounting standards4) Upload the data into a lease accounting sub-ledger5) Generate the new journal entries6) Produce updated balance sheet and eaccelerator.com605555010304515102020403530251- ‐866- ‐446- ‐0980

8How to Get Started with Your Lease Accounting ProjectKNOW YOUR IMPLEMENTATION DEADLINES2015CurrentStandardsPreparation &Transition201620172018FASB  ASC  840  (US  GAAP)  and  IAS  17  (IFRS)Plan  and  Implement  New  StandardsComparativeReportingPeriodIncome  StatementBalance  SheetNewStandardsFASB  ASC  842&  IFRS  16December  31,  2019Example – December 31 Fiscal ator.com1- ‐866- ‐446- ‐0980

9How to Get Started with Your Lease Accounting ProjectTHE BIG OPERATIONAL IMPACTSOn BalanceSheetAs mentioned earlier, operatingleases will now move onto thebalance sheet. Both US GAAPand IFRS will require new lineson the balance sheet to reporton Right-of-Use assets andliabilities. With the additionalvisibility provided to leases, thelevel of scrutiny from auditorswill increase. Expect to spendmore time with auditors testingthe completeness and theaccuracy of the leasing [email protected] TrackingSince leases will be reported on the balance sheetas assets, you will need to track all lease data at anasset-level. While most real estate leases have oneasset per schedule, this is not the case forequipment leases. Most companies track leasedata only at a schedule-level under the currentlease accounting standards. Gathering asset-leveldata will be one of the biggest he new lease accountingstandards consider someoutsourcing and service contractsto have embedded leases as well.In other words, contracts that alawyer or a banker might not call alease, could be deemed leases byaccountants if they meet certaincriteria. And even if 80% of theseservice contracts prove not to meetthe definition of a lease, you willstill have to collect the contractsand perform the analysis.1- ‐866- ‐446- ‐0980

10How to Get Started with Your Lease Accounting Project1)  Understandthe  New  Rules1PHASE 1 SUMMARYü Operating leases move on to the balance sheet, whichcould impact various financial metrics, debt covenants andeven executive compensation plans at some firms .2)  SituationalAssessment23)  Staff  theProject  Team3ü The biggest changes are the need to track leases at anasset level and the need to account for embedded leases.4)  Evaluate  YourLeasing  Program4LEARN MOREü The implementation deadlines start in December 2019 forpublic companies. However, three years of comparativereporting will be required for income statements.5)  Define  ProjectScope  &  Strategy56)  Define  Budget&  [email protected] more about the technical standards by reviewing one of theguides available from the standards boards or Big Four firms: FASB Standards DocumentationIFRS Standards DocumentationEY Lease Accounting GuidePWC Lease Accounting GuideDeloitte Lease Accounting GuideKPMG Lease Accounting Guidewww.leaseaccelerator.com1- ‐866- ‐446- ‐0980

PHASE 2SITUATIONAL ASSESSMENT

12How to Get Started with Your Lease Accounting ProjectBEFORE YOU MAKE YOUR FIRST MOVEAssess the SituationMany executives will make the mistake ofjumping into the lease accounting projectwithout really understanding the keychallenges. It is tempting to rush out topurchase a lease accounting package for 50,000 then starting to upload the data. Butthere is more than meets the eye with thesenew standards.Look Before You Leap Howencouragemany leaseshave?Weyoudotowestartby asking toughWhat percentageareUnderstandreal estate versusequipmentquestionsup front.the hidden(IT, fleet, etc.)?with the new accountingcomplexitiesWho owns non-realestate leases?standards.And understandwhat are expectedWhereisleasingdatastored?to be the top implementation challenges withWhen wasthethedata.last timeleasing wasaudited?collectingPerformingdiligenceupDo wewilltrackleasesyourat anriskasset-level?frontmitigateof project delays andWhat is yourissues.confidence level in the leasing data?compliance1- ‐866- ‐446- ‐0980

How to Get Started with Your Lease Accounting ProjectLOOK BENEATH THE SURFACEFinancial MetricsCredit ImpactFinancial ratios (EBITDA, ROA) impactedby move of leases onto the balance sheetas assets and liabilitiesCredit Ratings, Existing DebtCovenants, Future BorrowingAbilitiesAsset-Level TrackingIT, Fleet,EquipmentCurrent lease administrationsystems do not track at asset-level.Data needed for accounting notcaptured in any system.No one owns equipmentleases. Weak processes,controls and systems. Therewill be a significant effortrequired to collect data.Embedded ServiceContractsOutsourcing agreements and other servicescontracts may now be considered leases foraccounting purposesComparativeReportingThree years for IncomeStatement. Two years forBalance Sheet. Real deadlinefor tracking lease data is onlymonths away.Talent ScarcityRelatively few experts on leasing in themarket. As the deadline approaches itwill be challenging to find tor.com1- ‐866- ‐446- ‐0890

14How to Get Started with Your Lease Accounting ProjectTHE MOST COMMON MISTAKESIgnoring Non-Real EstateAlthough the dollar value of equipment leases mightbe lower than real estate, the number of leasecontracts is typically higher. The data for these leaseswill be much harder to collect. At most companiesthere is no centralized group that owns these leasesnor is there is an enterprise application to track them.Companies who put off data collection efforts forequipment until the eleventh hour of the project willfind themselves behind the proverbial “eight ball”scrambling to gather at the last minute.SOX and Post ImplementationAlthough the priority for most companies will becomplying with the initial deadline, a far greaterchallenge exists with the on-going reporting. Successrequires that you not only collect all the datanecessary to perform accounting on Day One, but thatyou develop a repeatable process to consistentlymaintain accurate, complete records in perpetuity.You will need to automate processes for tracking midterm and end-of-term changes to leases. And you willneed to have systems, policies and controls in placethat will stand up to the scrutiny of a SOX or.com1- ‐866- ‐446- ‐0980

15How to Get Started with Your Lease Accounting ProjectCONDUCT A QUICKASSESSMENTWho owns theleasing program?Where isleasing datastored?SystemsOwnershipWhen was thelast time leaseaccounting wasaudited?AccuracyHow manyleases do wehave?DataVisibilityAssessing the Maturity ofYour Leasing ProgramDo we trackleases at anasset-level?Ask these questions to key stakeholders. Then askthem what their confidence level in the answersis? Would they sign their name to the numbersprovided?The responses you get will provide you with asense of the maturity of your leasing program andthe scope of the challenge or.com1- ‐866- ‐446- ‐0980

16How to Get Started with Your Lease Accounting Project1)  Understandthe  New  Rules2)  SituationalAssessment123)  Staff  theProject  Team34)  Evaluate  YourLeasing  Program45)  Define  ProjectScope  &  Strategy56)  Define  Budget&  [email protected] 2 SUMMARYü Before rushing into the implementation of the project, take a fewweeks to gain situational awareness about leasing at yourcompany.ü Look beneath the surface to identify the true challenges with thenew standards. For most companies the heavy lifting will not bethe accounting, but gathering the data and putting the necessarycontrols and processes in place.ü Avoid the most common implementation mistakes. Get your armsaround equipment leases early in the process. Think beyond theinitial deadline by