SAB 74 DISCLOSURE ANALYSIS FOR LEASE ACCOUNTING

Transcription

1 SAB 74 DISCLOSURE ANALYSIS FOR LEASE ACCOUNTING Top 100 US Public Companies Ranked By Leasing Obligations ASC 842 LEASE ACCOUNTING STANDARDS

2 TABLE OF CONTENTS Executive Summary... 3 SAB 74 Disclosures... 3 Key Findings... 4 Detailed Analysis... 5 Balance Sheet Impacts Income Statement Cash Flow Statement Early Adoption Transition Method Practical Expedients Implementation Progress Project Team Software Evaluation And Selection Policies & Controls Lease Accounting Change SAB 74 Disclosures Additional References Top 100 Us Companies Ranked By Leasing Obligations LeaseAccelerator, Inc. All rights reserved. This document is the copyrighted work of LeaseAccelerator, Inc.

3 EXECUTIVE SUMMARY SAB 74 DISCLOSURES As the implementation deadlines for ASC 842 grow closer, public filers will be required to include a discussion of the potential future impacts to their financial statements from the new lease accounting standards. SEC Staff Accounting Bulletin Topic 11.M (SAB 74) requires SEC filers to disclose the effects of accounting standards that have been announced but not yet adopted. The guidance from the bulletin encourages registrants to consider disclosing: A brief description of the new standard, the date that adoption is required, and the date that the registrant plans to adopt, if earlier. A discussion of the methods of adoption allowed by the standard and the method expected to be utilized by the registrant, if determined. A discussion of the impact that adoption of the standard is expected to have on the financial statements of the registrant, unless not known or reasonably estimable. In that case, a statement to that effect may be made. Disclosure of the potential impact of other significant matters that the registrant believes might result from the adoption of the standard (such as technical violations of debt covenant agreements, planned or intended changes in business practices, etc.) is encouraged. In an effort to assist the industry with accelerated adoption of the new lease accounting standards, LeaseAccelerator compiled 100 examples of SAB 74 disclosures from SEC registrants over the past year. We focused on the top 100 US public companies as ranked by the total leasing obligations tabularized in the footnotes of annual filings. The source of the data was 10-Q and 10-K filings submitted between June 30, 2017 and May 31, TOP 100 US PUBLIC COMPANIES RANKED BY LEASING OBLIGATIONS 3

4 KEY FINDINGS Early Adoption With the revenue recognition standard (ASC 606) a number of companies including Alphabet, Microsoft, General Dynamics, Ford, and Raytheon were early adopters. Only two of the 100 companies analyzed, Microsoft and Target, adopted the standards early. No other companies stated their intention to early adopt. Transition Approach At the time these disclosures were analyzed, the only available transition approach for lessees was the modified retrospective approach, so companies either said they would elect that approach or did not comment on the approach. However, a new transition approach was proposed in November 2017 and tentatively approved in March We expect companies to state their selection of transition method in their next disclosures. Material Impacts to Balance Sheets As expected, the new right-of-use assets and liabilities being added to balance sheets is expected to be the most material impact to financial statements. 81% of the Top 100 reported that there will be a material impact resulting from the transfer of most right-of-use assets and liabilities on to corporate balance sheets. Another 15% are still analyzing the potential impacts of the new standard. Quantitative Impacts Companies are still in the process of estimating the definitive size of their leasing portfolios under ASC 842. Only 16% provided quantitative estimates of the material impact to the balance sheet, which ranged from $1.3 billion to $13 billion. Limited Impacts to Income Statement and Cash Flow Statements 29% of the Top 100 reported that there would not be a material impact to their income statement from ASC 842. Another 67% are still analyzing the impacts. 23% of the Top 100 reported there would be no impact to their cash flow statements and 70% are still analyzing the impact. Implementation Progress The level of information disclosed about the progress of implementation efforts is still relatively limited by most filers. Of the companies we analyzed, only 27% stated they are evaluating, developing, or implementing new policies and controls to support the standard. Similarly, amongst the filers we reviewed, only 25% stated they are implementing, developing, or have selected a lease accounting software application. Only 15% indicated that a project team had been formed to address the new standard. 4 SAB 74 DISCLOSURE ANALYSIS FOR LEASE ACCOUNTING (ASC 842)

5 DETAILED ANALYSIS BALANCE SHEET IMPACTS Balance Sheet Impacts will be Material As expected, the most material impact to financial statements cited by most filers is the new right-of-use assets and liabilities being added to the balance sheets. 81% of the Top 100 reported that there will be a material impact resulting from the transfer of most right-of-use assets and lease liabilities onto corporate balance sheets. Another 15% are still analyzing the potential impacts of the new standard. Bank of America and UnitedHealth Group were the only two companies in our sample set that indicated that the impact would not be material. While no other health care insurance companies were analyzed in this study, other financial institutions, such as JPMorgan ($10B) and Citigroup ($5B), did indicate that the balance sheet impact would be material, so there does not appear to be an industry-wide trend for commercial banks. Companies are still in the process of estimating the definitive size of their leasing portfolios under ASC 842. Only 16% provided quantitative estimates of the material impact to the balance sheet, which ranged from $1.3 billion to $13 billion. BALANCE SHEET IMPACTS Still Evaluating 15% Not Stated 2% Not Material 2% Material Impact 81% TOP 100 US PUBLIC COMPANIES RANKED BY LEASING OBLIGATIONS 5

6 EXAMPLES OF DISCLOSURE COMMENTS RELATED TO BALANCE SHEETS SEC REGISTRANT EXCERPT OF DISCLOSURE Apple While the Company is currently evaluating the timing and impact of adopting ASU , currently the Company anticipates recording lease assets and liabilities in excess of $9.6 billion on its Condensed Consolidated Balance Sheets, with no material impact to its Condensed Consolidated Statements of Operations. However, the ultimate impact of adopting ASU will depend on the Company s lease portfolio as of the adoption date. JPMorgan Chase & Co. Bank of America Corp. Exxon Mobil The Firm expects to recognize lease liabilities and corresponding right-of-use assets (at their present value) related to predominantly all of the $10 billion of future minimum payments required under operating leases as disclosed in Note 28 of JPMorgan Chase s 2017 Annual Report. However, the population of contracts subject to balance sheet recognition and their initial measurement remains under evaluation. The Corporation is in the process of reviewing its existing lease portfolios, including certain service contracts for embedded leases, to evaluate the impact of the standard on the consolidated financial statements, as well as the impact to regulatory capital and risk-weighted assets. The effect of the adoption will depend on the lease portfolio at the time of transition and the transition options ultimately available; however, the Corporation does not expect the new accounting standard to have a material impact on its consolidated financial position, results of operations or disclosures in the Notes to the Consolidated Financial Statements. The Corporation is gathering and evaluating data and recently acquired a system to facilitate implementation. We are progressing an assessment of the magnitude of the effect on the Corporation s financial statements. INCOME STATEMENT Under ASC 842, there is expected to be little impact to the income statement. Operating leases will be presented on the same line-item on the income statement, the same as under the current standard, ASC 840. For finance leases, which replace capital leases under ASC 840, the interest and amortization will still be presented separately. As a result, we expect few of the remaining 67% still evaluating and the 4% that did not comment on the income statement impacts to find a material impact to the income statement. CASH FLOW STATEMENT 70% of companies are still evaluating the impact to the cash flow statement and 23% have stated that there will be no impact to the cash flow statement. Only one company, Hertz Global Holdings, stated that they were expecting an impact to cash flow statements, and that is due to changes in the presentation of the company s operating activities. 6 SAB 74 DISCLOSURE ANALYSIS FOR LEASE ACCOUNTING (ASC 842)

7 EARLY ADOPTION With the revenue recognition standard (ASC 606) a number of companies including Alphabet, Microsoft, General Dynamics, Ford, and Raytheon were early adopters. The lease accounting standard has very few early adopters thus far. Only two of the 100 companies analyzed, Microsoft and Target, have early adopted. TRANSITION METHOD With other recent accounting changes, such as revenue recognition, much of the focus for SAB 74 disclosures was on the transition approach being adopted. However, until recently, only a modified retrospective approach was allowed under ASC 842. The modified retrospective method would have required companies to not only transition at the date of adoption, but also provide reports of their lease data under ASC 842 from the earliest comparative period to the effective date. For example, companies who will adopt on January 1, 2019 would have been required to report their lease data from January 1, 2017 to January 1, 2019 under both ASC 840 and ASC 842. However, on March 7, 2018 FASB voted to tentatively approve a simpler transition method that eliminates the need for comparative reporting. We expect that many companies will choose this approach as it reduces the implementation burden for corporate accounting organizations. Several companies, including Macy s and the Walt Disney Company, referred to the proposal in their disclosures, though did not state whether they would elect the option if approved. We anticipate that once the proposal has been finalized, many SEC files will state which transition approach they will use in their next disclosures. PRACTICAL EXPEDIENTS Amongst our sample set, only eight companies indicated an intention to elect the practical expedients available under ASC 842. Another 11companies indicated that they were investigating the practical expedients. However, most did not provide any commentary. TOP 100 US PUBLIC COMPANIES RANKED BY LEASING OBLIGATIONS 7

8 EXAMPLES OF DISCLOSURE COMMENTS RELATED TO PRACTICAL EXPEDIENTS SEC REGISTRANT Target CenturyLink International Business Machines EXCERPT OF DISCLOSURE The modified retrospective approach provides a method for recording existing leases at adoption and in comparative periods that approximates the results of a full retrospective approach. In addition, we elected the package of practical expedients permitted under the transition guidance within the new standard, which among other things, allowed us to carry forward the historical lease classification. We also elected the practical expedient related to land easements, allowing us to carry forward our accounting treatment for land easements on existing agreements. In addition, we elected the hindsight practical expedient to determine the lease term for existing leases. Our election of the hindsight practical expedient resulted in the shortening of lease terms for certain existing leases and the useful lives of corresponding leasehold improvements. In our application of hindsight, we evaluated the performance of the leased stores and the associated markets in relation to our overall real estate strategies, which resulted in the determination that most renewal options would not be reasonably certain in determining the expected lease term. The modified retrospective approach includes a number of optional practical expedients that we may elect to apply. On January 25, 2018, the FASB issued ASU , Leases: Land Easement Practical Expedient for Transition to ASU ASU permits reporting companies to elect to forego reassessments of land easements that exist or expire before the entity s adoption of ASU and that were not previously accounted for as leases. The company is currently planning on electing the package of practical expedients to not reassess prior conclusions related to contracts containing leases, lease classification and initial direct costs and is evaluating the other practical expedients available under the guidance. IMPLEMENTATION PROGRESS The level of information disclosed about the progress of implementation efforts is still relatively limited by most filers. A significant work effort will be required to comply with the new lease accounting standards by most companies with portfolios in excess of $100M. Changes will be required to accounting systems, business processes, and financial controls. A cross-functional project team will need to be formed consisting of stakeholders that use the leased assets such as Real Estate, IT, and Operations as well as corporate functions that administer the leases such as Procurement, Corporate Treasury, and Accounts Payable. The project team will need to devise a strategy for identifying all of the leasing contracts across the enterprise, including categories such as real estate, IT, fleet, material handling, and other industry-specific assets. Once the population of leases is identified, the contracts for each will need to be identified in order to abstract the data necessary for accounting. Most companies will implement a new software application designed to perform the specialized lease accounting required for ASC 842. Once selected, the software application will need to be tested for functionality, integrated with other financial systems, and rolled out with training to end users. 8 SAB 74 DISCLOSURE ANALYSIS FOR LEASE ACCOUNTING (ASC 842)

9 EXAMPLES OF DISCLOSURE COMMENTS RELATED TO IMPLEMENTATION SEC REGISTRANT AutoZone O Reilly Automotive Kroger Ulta Beauty EXCERPT OF DISCLOSURE The Company established a cross-functional implementation team to evaluate and identify the impact of ASU on the Company s financial position, results of operations and cash flows. Based on the preliminary work completed, the Company has concluded its assessment on its leasing arrangements, evaluated the impact of applying the practical expedients and accounting policy elections and is currently working on implementing software to meet the reporting requirements of this standard. The Company is also in the process of identifying changes to its business processes and controls to support adoption of the new standard. The team is continuing to understand the full analysis of the adoption, but is unable to quantify the impact at this time. The Company anticipates the adoption of this new standard to result in a significant increase in lease-related assets and liabilities on the Company s consolidated balance sheets. The impact on the Company s consolidated statements of income is currently being evaluated. As the impact of this standard is non-cash in nature, the Company does not anticipate its adoption to have an impact on the Company s consolidated statement of cash flows. The Company has established a task force, composed of multiple functional groups inside of the Company, which is currently in the process of evaluating critical components of this new guidance and the potential impact of the guidance on the Company s financial position, results of operations and cash flows. Based on the preliminary work completed, the Company is considering the potential implications of the new standard on determining the discount rate to be used in valuing new and existing leases, the treatment of existing favorable and unfavorable lease agreements acquired in connection with previous acquisitions, procedural and operational changes that may be necessary to comply with the provisions of the guidance and all applicable financial statement disclosures required by the new guidance, all of which are areas that could potentially be impacted by adoption of the guidance. At this time, the task force has not completed its full evaluation; however, the Company believes the adoption of the new guidance will have a material impact on the total assets and total liabilities reported on the Company s consolidated balance sheets. The adoption of this ASU will result in a significant increase to our Consolidated Balance Sheets for lease liabilities and right-of-use assets, and we are currently evaluating the other effects of adoption of this ASU on our Consolidated Financial Statements. This evaluation process includes reviewing all forms of leases, performing a completeness assessment over the lease population, analyzing the practical expedients and assessing opportunities to make certain changes to our lease accounting information technology system in order to determine the best implementation strategy. We believe our current off-balance sheet leasing commitments are reflected in our investment grade debt rating. The Company will adopt the new standard in fiscal The Company s ability to adopt depends on system readiness, including software procured from third-party providers, and completing an analysis of information necessary to quantify the financial statement impact. The Company formed a project team to review the current accounting policies and practices and assess the effect of the standard on the consolidated financial statements. The team completed a preliminary assessment of the potential impact of adopting ASU on the consolidated financial statements. The adoption of ASU will have a material impact on the Company s consolidated financial position, but the Company is not able to quantify the difference at this time. The Company does not believe adoption of this standard will have a material impact on the Company s consolidated results of operations or cash flows. TOP 100 US PUBLIC COMPANIES RANKED BY LEASING OBLIGATIONS 9

10 PROJECT TEAM Amongst our sample set, only 15% indicated that a project team had been formed to address the new standard. Leadership of the lease accounting project typically sits within the finance or accounting team. However, unlike many other accounting change projects, there is a need for a cross-functional enterprise team to address the leasing standards. A significant amount of business process transformation and data collection will be required from both the users of leased assets and the corporate functions that support the leasing program. The users of leased assets span almost every function in the business, including Corporate IT, Real Estate, Fleet, and Operations. The organizations that touch leases throughout their lifecycle include Legal and Procurement, Treasury and Tax, and Accounts Payable and Receivables. EXAMPLES OF DISCLOSURE COMMENTS RELATED TO PROJECT TEAMS SEC REGISTRANT Dollar General DaVita J.C. Penney EXCERPT OF DISCLOSURE The Company formed a project team to assess and implement the standard, which has completed its evaluation of existing contractual arrangements for embedded leases. The project team is also testing computations in the Company s lease administration system, integrating interfaces between the lease administration system and the enterprise resource planning systems, and comparing the Company s current accounting policies to the new standard. As a result of the efforts of this project team, the Company has identified its store leases as the area in which it would most likely be affected by the new guidance. The Company has assembled an internal lease task force that meets regularly to discuss and evaluate the overall impact of this guidance on its consolidated financial statements and related disclosures, as well as the expected timing of adoption. We have developed a project team to analyze the impacts of the new standard on our current accounting policies and internal controls and the changes required to be made by our leasing software provider. 10 SAB 74 DISCLOSURE ANALYSIS FOR LEASE ACCOUNTING (ASC 842)

11 SOFTWARE EVALUATION AND SELECTION Similarly, amongst the filers we reviewed only 24% are implementing or have selected a lease accounting software application. Historically, most companies have performed lease accounting and financial reporting under the current standards using a collection of spreadsheets. Although ASC 842 does not require the use of any specific software application, we believe that most companies with leasing portfolios in excess of $50M will elect to purchase new technology. Since the introduction of ASC 842, a number of commercial, off-the-shelf software packages have been released to the market specifically designed to support the new lease accounting requirements. These applications feature dedicated leasing subledgers that track all the necessary journal entries, accounting engines to perform multiple set-of-book reporting, and algorithms to automatically classify contracts as operating or finance leases. EXAMPLES OF DISCLOSURE COMMENTS RELATED TO SOFTWARE IMPLEMENTATION SEC REGISTRANT FedEx Ascena Retail Group Dollar Tree Verizon EXCERPT OF DISCLOSURE Additionally, we are implementing an enterprise-wide lease management system to assist in the accounting and are evaluating additional changes to our processes and internal controls to ensure we meet the standard s reporting and disclosure requirements. The Company is also in the process of implementing a new lease administration system and identifying changes to its business processes and controls to support adoption of the new standard in Fiscal Additionally, the Company is implementing lease accounting software to assist in the quantification of the expected impact on the consolidated balance sheets and to facilitate the calculations of the related accounting entries and disclosures. We have established a cross-functional coordinated team to implement the standard update. We are in the process of determining the scope of impact, data gathering and assessment, and designing a new system solution. TOP 100 US PUBLIC COMPANIES RANKED BY LEASING OBLIGATIONS 11

12 POLICIES AND CONTROLS Of the companies we analyzed, only 27% are evaluating or implementing new policies and controls to support the standard. With leases representing a significant set of assets and liabilities on the balance sheet, many companies may adopt additional best practices to ensure that leasing portfolios are being optimized. Accounting organizations will need to ensure that they maintain complete, accurate, and up-to-date records of all leases across the business not only at commencement of the contract, but also throughout the term of the agreement. New business processes will need to be put in place to ensure all the necessary data required for accounting is collected at the start of the lease. Controls will be required to ensure that any contractual updates or business plan changes resulting in a modification or reassessment are relayed to the accounting organization. EXAMPLES OF DISCLOSURE COMMENTS RELATED TO POLICIES AND CONTROLS SEC REGISTRANT Chipotle EOG Resources Dow DuPont EXCERPT OF DISCLOSURE We are assessing the impact to our accounting policies, processes, disclosures, and internal control over financial reporting. EOG is continuing its assessment of ASU by implementing its project plan, evaluating certain operational and corporate policies and processes, further defining its population of leases, reviewing certain contracts and considering the election of practical expedients. The Company has a team in place to evaluate the new guidance, is in the process of implementing software solutions and is facilitating the development of business processes and controls around leases to meet the new accounting and disclosure requirements upon adoption in the first quarter of SAB 74 DISCLOSURE ANALYSIS FOR LEASE ACCOUNTING (ASC 842)

13 LEASE ACCOUNTING CHANGE EXAMPLES OF STANDARD DISCLOSURE COMMENTS ON ASC 842 SEC REGISTRANT Capital One Financial Live Nation Entertainment Hertz Global Holdings EXCERPT OF DISCLOSURE This guidance is effective for us on January 1, 2019, with early adoption permitted, using the modified retrospective method of adoption. We plan to adopt the standard on the effective date. We are currently in the process of reviewing lease contracts, implementing a new lease accounting and administration software solution, establishing new processes and internal controls and evaluating the impact of various accounting policy elections. Upon adoption, we expect to record a right of use asset and a corresponding lease liability for our operating leases where we are the lessee. The potential impact on our consolidated financial statements is largely based on the present value of future minimum lease payments, the amount of which will depend upon the population of leases in effect at the date of adoption. Future minimum lease payments totaled $2.7 billion as of December 31, 2017, as disclosed in Note 8 Premises, Equipment and Lease Commitments of our 2017 Form 10-K. We do not expect material changes to the recognition of operating lease expense in our consolidated statements of income To assess the impact of the standard, the Company has dedicated certain of its personnel to lead the implementation effort. These personnel reviewed the amended guidance and subsequent clarifications and attended multiple training sessions in order to understand the potential impact the new standard could have on the Company s financial position and results of operations. The Company has formed a cross-functional steering committee including members from its major divisions. The Company is in the process of implementing third-party lease accounting software to record, analyze and calculate the financial statement and disclosure impacts. The Company will finalize its conclusions in 2018 and ensure that it can produce the data necessary for the required disclosures along with assessing changes to internal controls and processes that may be required to comply with the new lease accounting and disclosure requirements. The Company will adopt this standard on January 1, 2019 and is currently evaluating the impact that this guidance will have on its financial position and results of operations. The Company intends to adopt this guidance, in accordance with the effective date, on January 1, A modified retrospective transition approach is required for both lessees and lessors for existing leases at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. The Company is still in the process of evaluating whether to avail itself of allowable practicable expedients during transition. The Company is evaluating the Proposed Accounting Standards Update, Leases (Topic 842) Targeted Improvements that were tentatively affirmed by the FASB at its March 2018 meetings. The update provides a transition method that would allow the Company to only apply the new lease standard in the year of adoption. Additionally, it provides a practical expedient for lessors to combine non-lease components with the related lease components if certain conditions are met. This could allow the Company to account for all revenue earned from the operations of rental vehicles and from other forms of rental related activities under the new lease guidance. Lessee: Adoption of Topic 842 will result in a material increase in the Company s lease-related assets and liabilities on its balance sheet, primarily for leases of rental locations and other assets. Additionally, adoption of this guidance will impact the statement of cash flows with respect to the presentation of the Company s operating activities, but is not expected to impact its presentation of investing or financing activities. Adoption of Topic 842 is not expected to have a material impact on the Company s results of operations. The Company has reached conclusions on key accounting assessments related to its leases and is performing an analysis of its lease portfolio to ensure proper application of the new guidance including implementation of internal controls over financial reporting. TOP 100 US PUBLIC COMPANIES RANKED BY LEASING OBLIGATIONS 13

14 SAB 74 DISCLOSURES EXCERPT FROM TOPIC 11: MISCELLANEOUS DISCLOSURE M. Disclosure Of The Impact That Recently Issued Accounting Standards Will Have On The Financial Statements Of The Registrant When Adopted In A Future Period Facts: An accounting standard has been issued5 that does not require adoption until some future date. A registrant is required to include financial statements in filings with the Commission after the issuance of the standard but before it is adopted by the registrant. Question 2: Does the staff have a view on the types of disclosure that would be meaningful and appropriate when a new accounting standard has been issued but not yet adopted by the registrant? Interpretive Response: The staff believes that the registrant should evaluate each new accounting standard to determine the appropriate disclosure and recognizes that the level of information available to the registrant will differ with respect to various standards and from one registrant to another. The objectives of the disclosure should be to (1) notify the reader of the disclosure documents that a standard has been issued which the registrant will be required to adopt in the future and (2) assist the reader in assessing the significance of the impact that the standard will have on the financial statements of the registrant when adopted. The staff understands that the registrant will only be able to disclose information that is known. The following disclosures should generally be considered by the registrant: A brief description of the new standard, the date that adoption is required and the date that the registrant plans to adopt, if earlier. A discussion of the methods of adoption allowed by the standard and the method expected to be utilized by the registrant, if determined. A discussion of the impact that adoption of the standard is expected to have on the financial statements of the registrant, unless not known or reasonably estimable. In that case, a statement to that effect may be made. Disclosure of the potential impact of other significant matters that the registrant believes might result from the adoption of the standard (such as technical violations of debt covenant agreements, planned or intended changes in business practices, etc.) is encouraged. 14 SAB 74 DISCLOSURE ANALYSIS FOR LEASE ACCOUNTING (ASC 842)

15 ADDITIONAL REFERENCES SAB 74 DISCLOSURES - GENERAL MFA, Reminder: SEC SAB 74 Disclosures and Controls for New Accounting Standards, cpa.com/en/our%20insights/2017/07/reminder%20sec%20sab%2074%20 Disclosures%20and%20Controls%20for%20New%20Accounting%20Standards.aspx PwC, Recently issued accounting standards Governance considerations, cfodirect/assets/pdf/in-the-loop/sab-74-new-accounting-standards.pdf SAB 74 DISCLOSURES FOR LEASE ACCOUNTING KPMG, ASC 842, Leases Transition Disclosures, RSM, SAB 74 disclosures for new standard on lease accounting, FASB Updated Guidance on ASC 842 FASB, Proposed Accounting Standards Update, Thomson Reuters, Easier Method for Completing Transition to Lease Standard Moves Forward, TOP 100 US PUBLIC COMPANIES RANKED BY LEASING OBLIGATIONS 15

16 TOP 100 US COMPANIES RANKED BY LEASING OBLIGATIONS RANK COMPANY SELECTED DISCLOSURE EXCERPTS 1 Walgreens Boots Alliance The Company will adopt this ASU on September 1, 2019 (fiscal 2020). The Company has begun evaluating and planning for adoption and implementation of this ASU, including selecting a new lease accounting system, evaluating practical expedient and accounting policy elections, and assessing the overall financial statement impact. This ASU will have a material impact on the Company s financial position. The impact on the Company s results of operations is being evaluated. The impact of this ASU is non-cash in nature and will not affect the Company s cash flows. 2 CVS Health The Company believes that the new standard will have a material impact on its consolidated balance sheet. The Company is currently evaluating the effect that implementation of this standard will have on the Company s consolidated results of operations, cash flows, financial position and related disclosures. 3 AT&T Upon initial evaluation, we believe the key change upon adoption will be the balance sheet recognition. At adoption, we will recognize a right-to-use asset and corresponding lease liability on our consolidated balance sheets. The income statement recognition of lease expense appears similar to our current methodology. We are continuing to evaluate the magnitude and other potential impacts to our financial statements. 4 Amazon.com We plan to adopt this ASU beginning in Q We are continuing to evaluate the impact and expect the ASU will have a material impact on our consolidated financial statements, primarily to the consolidated balance sheets and related disclosures. 5 Verizon Communications Verizon s current operating lease portfolio is primarily comprised of network, real estate, and equipment leases. Upon adoption of this standard, we expect to recognize a right of use asset and liability related to substantially all operating lease arrangements. We have established a cross-functional coordinated team to implement the standard update. We are in the process of determining the scope of impact, data gathering and assessment, and designing a new system solution. We are also evaluating our processes and internal controls to meet the standard update s accounting, reporting and disclosure requirements. Although we have not yet completed our evaluation of the standard update s impact, we expect its adoption to have a significant impact on our condensed consolidated balance sheet. 6 FedEx Based on our lease portfolio, we currently anticipate recognizing a lease liability and related right-of-use asset on our balance sheet in excess of $13 billion, with an immaterial impact on our income statement compared to the current lease accounting model. However, the ultimate impact of the standard will depend on the company s lease portfolio as of the adoption date. We are currently in the process of evaluating our existing lease portfolio, including accumulating all of the necessary information required to properly account for the leases under the new standard. Additionally, we are implementing an enterprise-wide lease management system to assist in the accounting and are evaluating additional changes to our processes and internal controls to ensure we meet the standard s reporting and disclosure requirements. These changes will be effective June 1, 2019 (fiscal 2020). 16 SAB 74 DISCLOSURE ANALYSIS FOR LEASE ACCOUNTING (ASC 842)

17 7 United Continental Holdings We have not completed our evaluation of the impact but believe this standard will have a significant impact on our consolidated balance sheets but is not expected to have a material impact on the Company s results of operations or cash flows. The primary effect of adopting the new standard will be to record assets and obligations for its operating leases. 8 Delta Air Lines We will adopt this standard effective January 1, We have not completed our assessment, but the adoption of this standard will have a significant impact on our Consolidated Balance Sheets. However, we do not expect the adoption to have a significant impact on the recognition, measurement or presentation of lease expenses within the Condensed Consolidated Statements of Operations and Comprehensive Income ( income statement ) or the Condensed Consolidated Statements of Cash Flows ( cash flows statement ). Information about our undiscounted future lease payments and the timing of those payments is in Note 7, Lease Obligations, in our Form 10-K. 9 Wal-Mart Stores. 10 Bank of America Corp. The Company will adopt this ASU on February 1, 2019 and is implementing new lease systems in connection with the adoption. Management is progressing with implementation and continuing to evaluate the effect to the Company s Condensed Consolidated Financial Statements and disclosures. Management expects a material impact to the Company s Condensed Consolidated Balance Sheet. The Corporation is in the process of reviewing its existing lease portfolios, including certain service contracts for embedded leases, to evaluate the impact of the standard on the consolidated financial statements, as well as the impact to regulatory capital and risk-weighted assets. The effect of the adoption will depend on the lease portfolio at the time of transition and the transition options ultimately available; however, the Corporation does not expect the new accounting standard to have a material impact on its consolidated financial position, results of operations or disclosures in the Notes to the Consolidated Financial Statements. 11 McDonald s The Company will adopt the new standard effective January 1, At transition, the Company will recognize and measure leases using the required modified retrospective approach. The Company anticipates ASU will have a material impact to the consolidated balance sheet due to the significance of the Company s operating lease portfolio. The Company will elect an optional practical expedient to retain the current classification of leases, and, therefore, anticipates a minimal initial impact on the consolidated statement of income. The impact of ASU is noncash in nature; therefore, it will not affect the Company s cash flows. 12 American Airlines Group We will adopt the New Lease Standard effective January 1, We are currently evaluating how the adoption of the New Lease Standard will impact our consolidated financial statements. Interpretations are on-going and could have a material impact on our implementation. Currently, we expect that the adoption of the New Lease Standard will have a material impact on our consolidated balance sheet due to the recognition of right-of-use assets and lease liabilities principally for certain leases currently accounted for as operating leases. TOP 100 US PUBLIC COMPANIES RANKED BY LEASING OBLIGATIONS 17

18 13 Crown Castle International. This guidance is effective for the Company as of January 1, 2019 and is required to be applied using a modified retrospective approach for all leases existing at, or entered into after, the beginning of the earliest comparative period presented. Although early adoption is permitted, the Company does not expect to early adopt the new guidance prior to January 1, With regard to the application of this guidance to the Towers segment, the Company expects that (1) its Towers lessee arrangements will continue to be classified as operating leases under the new guidance; (2) this guidance will have a material impact on its condensed consolidated balance sheet due to the addition of right-of-use assets and lease liabilities for all lessee arrangements with a term greater than 12 months; and (3) there will not be a material impact to its condensed consolidated statement of operations and condensed consolidated statement of cash flows. With regard to the application of this guidance to the Fiber segment, the Company (1) has established and is progressing through the various steps of a cross-functional project plan to assess the impact of the standard; (2) expects this guidance to have a material impact on its condensed consolidated balance sheet due to the addition of right-of-use assets and lease liabilities for all lessee arrangements with a term greater than 12 months; and (3) continues to assess additional impacts to its condensed consolidated financial statements, including the condensed consolidated statement of operations and the condensed consolidated statement of cash flows. 14 American Tower The Company (i) has established a multidisciplinary team to assess and implement the new guidance, (ii) expects the guidance to have a material impact on its consolidated balance sheets due to the recording of right of use assets and lease liabilities for leases in which it is a lessee and which it currently treats as operating leases and (iii) continues to evaluate the impact of the new guidance. 15 JPMorgan Chase & Co. The Firm is in the process of its implementation which includes an evaluation of its leasing activities and certain contracts for embedded leases. As a lessee, the Firm is developing its methodology to estimate the right-of-use assets and lease liabilities, which is based on the present value of lease payments. The Firm expects to recognize lease liabilities and corresponding right-of-use assets (at their present value) related to predominantly all of the $10 billion of future minimum payments required under operating leases as disclosed in Note 28 of JPMorgan Chase s 2017 Annual Report. However, the population of contracts subject to balance sheet recognition and their initial measurement remains under evaluation. The Firm does not expect material changes to the recognition of operating lease expense in its Consolidated statements of income. The Firm plans to adopt the new guidance on January 1, Apple The Company will adopt ASU in its first quarter of 2020 utilizing the modified retrospective transition method. While the Company is currently evaluating the impact of adopting ASU , based on the lease portfolio as of March 31, 2018, the Company anticipates recording lease assets and liabilities of approximately $9.0 billion on its Condensed Consolidated Balance Sheets, with no material impact to its Condensed Consolidated Statements of Operations. However, the ultimate impact of adopting ASU will depend on the Company s lease portfolio as of the adoption date. 18 SAB 74 DISCLOSURE ANALYSIS FOR LEASE ACCOUNTING (ASC 842)

19 17 TJX We plan to adopt this standard in the first quarter of the fiscal year ending February 1, The Company is in the process of implementing a new lease accounting system and has established a cross-functional team to implement the updated lease guidance. This team is in the process of evaluating our lease portfolio to assess the impact this standard will have on our Consolidated Financial Statements and Notes thereto. The Company expects this standard to have a material impact on its statement of financial condition as it will record a significant asset and liability associated with its more than 4,100 leased locations. We plan to implement the transition package of three practical expedients permitted within the standard, which among other things, allows for the carryforward of historical lease classifications. We expect to make an accounting policy election that will keep leases with a term of 12 months or less off the balance sheet and result in recognizing those lease payments on a straight-line basis over the lease term. As our leases do not provide an implicit rate, we plan to use our incremental borrowing rate based on information available at commencement date to determine the present value of future payments. The Company has determined that the initial lease term will not differ under the new standard versus current accounting practice, and therefore the income statement impact of the new standard is not expected to be material. 18 Dollar General The Company formed a project team to assess and implement the standard, which has completed its evaluation of existing contractual arrangements for embedded leases. The project team is also testing computations in the Company s lease administration system, integrating interfaces between the lease administration system and the enterprise resource planning systems, and comparing the Company s current accounting policies to the new standard. As a result of the efforts of this project team, the Company has identified its store leases as the area in which it would most likely be affected by the new guidance. The Company s assessment of the impact that adoption of this guidance will have on its consolidated financial statements is ongoing, and the Company anticipates a material impact because it is party to a significant number of lease contracts for its stores. 19 Alphabet Based on our current portfolio of leases, approximately $8 billion of lease assets and liabilities would be recognized on our balance sheet, primarily relating to real estate. We are in the process of implementing changes to our systems and processes in conjunction with our review of lease agreements. We will adopt Topic 842 effective January 1, 2019 and expect to elect certain available transitional practical expedients. 20 Starbucks The guidance will require modified retrospective application at the beginning of our first quarter of fiscal 2020, with optional practical expedients, but permits adoption in an earlier period. We are currently evaluating the impact this guidance will have on our consolidated financial statements. We expect this adoption will result in a material increase in the assets and liabilities on our consolidated balance sheets but will likely have an insignificant impact on our consolidated statements of earnings. In preparation for the adoption of the guidance, we are in the process of implementing controls and key system changes to enable the preparation of financial information. 21 Berkshire Hathaway We are currently evaluating the effect this standard will have on our Consolidated Financial Statements. TOP 100 US PUBLIC COMPANIES RANKED BY LEASING OBLIGATIONS 19

20 22 Microsoft We elected to early adopt the standard effective July 1, 2017 concurrent with our adoption of the new standard related to revenue recognition. We elected the available practical expedients and implemented internal controls and key system functionality to enable the preparation of financial information on adoption. The standard had a material impact on our consolidated balance sheets, but did not have an impact on our consolidated income statements. The most significant impact was the recognition of ROU assets and lease liabilities for operating leases, while our accounting for finance leases remained substantially unchanged. Adoption of the standard required us to restate certain previously reported results, including the recognition of additional ROU assets and lease liabilities for operating leases. Refer to Impacts to Previously Reported Results below for the impact of adoption of the standard on our consolidated financial statements. 23 Kroger This guidance will be effective for us in the first quarter of fiscal year ending February 1, Early adoption is permitted. The adoption of this ASU will result in a significant increase to our Consolidated Balance Sheets for lease liabilities and rightof-use assets, and we are currently evaluating the other effects of adoption of this ASU on our Consolidated Financial Statements. This evaluation process includes reviewing all forms of leases, performing a completeness assessment over the lease population, analyzing the practical expedients and assessing opportunities to make certain changes to our lease accounting information technology system in order to determine the best implementation strategy. We believe our current off-balance sheet leasing commitments are reflected in our investment grade debt rating. 24 Dollar Tree The Company will adopt the standard in the first quarter of fiscal The Company has engaged a third party to assist in its preparation for implementation and its evaluation of the impact of the new pronouncement on its consolidated financial statements. The Company continues to assess the effect the implementation will have on its existing accounting policies and the consolidated financial statements and expects the adoption of this pronouncement to result in a material increase in the assets and liabilities on its consolidated balance sheets, with an immaterial impact on its consolidated income statements and consolidated statements of cash flows. Additionally, the Company is implementing lease accounting software to assist in the quantification of the expected impact on the consolidated balance sheets and to facilitate the calculations of the related accounting entries and disclosures. The Company is also evaluating additional changes to its processes and internal controls to ensure it is compliant with the reporting and disclosure requirements of the standard. As of February 3, 2018, the Company had $7.4 billion in undiscounted future minimum operating lease commitments. 25 Home Depot We are evaluating and planning for the adoption and implementation of ASU No We believe that ASU No will have a material impact on our financial position, as a result of the requirement to recognize right-of-use assets and lease liabilities on our consolidated balance sheets. The impact to our results of operations is being evaluated, and we do not believe there will be a material impact to our cash flows upon adoption of ASU No SAB 74 DISCLOSURE ANALYSIS FOR LEASE ACCOUNTING (ASC 842)