The Leases are coming to your balance sheet

Transcription

1 The Leases are coming to your balance sheet Marybeth Shamrock Accounting Change Services Leader and Advisory Leasing Leader KPMG LLP Shane Hendricks KPMG Leasing Tool Implementation Leader KPMG LLP Shari Mager Partner, Accounting Advisory Services KPMG LLP December 11, 2017

2 Agenda Current State of Affairs Effective Implementation What Preparers Have Said: Results from KPMG s recent accounting change survey Our Perspective Question and Answer Session 2

3 Current state of affairs

4 Effective dates Public business entities, certain not-for-profit entities, and certain employee benefit plans All other entities Early Adoption Date of initial application Transition Relief Interim and annual periods in fiscal years beginning after December 15, 2018 Annual periods in fiscal years beginning after December 15, 2019, and interim periods in fiscal years beginning one year later Early adoption permitted for all entities at any time after issuance The first day of the earliest comparative period presented in the first annual financial statements post-effective date The board has proposed an amendment to give all companies the option to use the effective date of the new leases standard as their date of initial application in transition Companies that elect this transition option would not have to adjust their comparative financial statements for effects of the new standard or make the new required lease disclosures for periods before the effective date 4

5 Effective implementation

6 Potential impacts of lease accounting changes Accounting and Reporting Impacts Increased management judgment Potential for increased level of effort/reporting volatility Potential dual reporting (U.S. GAAP and IFRS) New ROU assets can be impaired New book-tax differences New accounting policies and procedures Significant new disclosure requirements Opening balance sheet and comparative periods Transition & ongoing external audit effort Systems & Processes Impacts Existing lease systems functionality shortfalls Need complete lease inventory Capturing salient lease terms in a database Expanded data needs may necessitate a need for forecasting and other systems Increased management judgment Changes to process documentation and SOX 404 testing will be required 6

7 Potential impacts of lease accounting changes (continued) Business Impacts Moderate to significant changes for - Lessees - ROA calculations - Current ratios - Debt-to-asset ratio - Leverage ratios Buy versus lease decisions Potential need to renegotiate current lease terms Potential impact on state and local taxes paid (e.g., apportionment of taxable income) People & Change Impacts Need for strong project management office Effective governance structure and communication protocols Communication and training to impacted departments Support of the conversion project and ongoing accounting Other departments potentially affected: FP&A and Tax 7

8 What preparers have said Results from KPMG s recent accounting change survey

9 Expected level of impact of new leases standard Q. What level of impact do you expect in each of the following areas as a result of the new leases standard? Rate each on a scale of 1 to 5 (1 = no impact, 5 = significant impact): Mean Balance sheet 19% 26% 55% 3.7 Disclosures / reporting 16% 28% 56% 3.6 Systems 37% 24% 39% 3.1 Financial ratios / debt covenants 46% 25% 29% 2.8 Income statement 55% 25% 20% 2.6 Operations 56% 29% 16% 2.4 Leasing practices (lease vs. purchase decisions) 57% 27% 15% 2.4 Tax reporting 56% 32% 12% 2.4 Investor relations / communications 62% 27% 12% 2.2 Other 77% 15% 8% 1.7 0% 20% 40% 60% 80% 100%

10 Progress on implementation to the new leases standard Q. Please indicate the progress your organization has made against each of the following implementation activities related to the new leases standard: Establish program management team 23% 25% 49% 4% Perform lease inventory 23% 47% 28% 2% Select lease accounting software 51% 23% 16% 10% Perform accounting assessment 35% 51% 13% 1% Develop system or process requirements 55% 35% 6% 3% Design software or process solution 61% 23% 5% 11% Gather and validate data 43% 52% 4% 1% Calculate the transition impact 67% 28% 4% 1% Analyze tax impacts 74% 21% 2% 3% Conduct training 59% 33% 5% 3% Complete implementation 66% 32% <1% 2% Other 32% 3% 64% 0% 20% 40% 60% 80% 100% No progress Some progress Activity completed Not applicable 10

11 Challenges in implementing the new leases standard Q. What challenges are you facing related to the implementation of the new leases standard that you did not anticipate?* Identifying embedded leases 44% 49% 78% Selecting and implementing an adequate leasing system 48% 48% 44% Abstracting and entering leases into a leasing system 11% 37% 41% Locating a lease 37% 35% 44% Establishing assumptions and inputs such as discount rate and likelihood of renewal Estimating operating costs or service components in leases to exclude from capitalization 11% 25% 24% 30% 33% 33% Other includes: Identifying all leases Joint operations effect on leases and disclosures Reporting on the proper accounting treatment and disclosures Defining a lease Other 0% 11% 10% 11% 21% 22% 19% 19% 22% Open issue with easements Separating non-lease components Standard setter feedback Using hindsight as a practical expedient 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% Total (n = 63) Public (n = 54) Private (n = 9*) * Among those who selected Yes, there are surprises that we did not anticipate when asked about unanticipated challenges related to the leases implementation effort 11

12 Expected time to implement changes to existing system or new software solution Q. The total amount of time to implement changes to existing system or new software solution for the new leases standard is expected to be: 1 to 3 months 4 to 6 months 12% 13% 10% 14% 13% 17% 7 to 9 months 10 to 12 months Over 12 months 10% 8% 7% 8% 7% 8% 15% 15% 17% Do not know / Not sure 42% 42% 42% 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% Total (n = 241) Public (n = 182) Private (n = 59) 12

13 Early adoption of the new leases standard Q. Has/will your organization early adopt(ed) the new leases standard? 100% 80% 81% 83% 75% 60% 40% 20% 8% 8% 8% 11% 10% 17% 0% Yes No Do not know / Not sure Total (n = 245) Public (n = 186) Private (n = 59) 13

14 Our perspective

15 Where the work is How to get there Future Consolidate lease accounting systems/spreadsheets Low Identify project team and objectives Establish governance protocols Medium Identify in-scope population of lease agreements High Populate a database of lease terms Model and respond to business impacts Update lease accounting policies and procedures Assign accounting assumptions and pool similar leases Prepare transitional financial statements and disclosures Transition to future state leasing process 15

16 Where to begin: Develop a structured approach After identifying a project team, determine the best approach to achieve your objectives... Centralized Decentralized Advantages: Supports consistency of data capture Controlled, easy-to-oversee Establish center of excellence Streamline timing of data Disadvantages: May not be a viable go-forward model Challenges presented with leases in other languages Requires full-time project team Considerations Personnel & other resources Timeline Nature of operations Risks Current location/state of lease data Hybrid Approach Outsource Lease Abstraction Advantages: Establishes a viable go-forward process Easier for individual BU reconciliations/processing Eliminates language challenges Obtain greater buy-in across the organization Disadvantages: Requires extensive training and communication Difficult to ensure consistency of data capture Prolonged close process 16

17 Why is it important to start now?? Is the lease population complete? Contract reviews for potential embedded leases Leases previously not identified as leases? Resource needs for data abstraction (additional data needed for accounting and new disclosures)?? Who will make and review lease-by-lease accounting estimates (e.g., residual value, discount rate, reasonably certain assessment, or others)?? Does the company have systems and/or processes to store data and facilitate Day 2 accounting consequences like reassessment, impairment? 17

18 Questions to consider when selecting a lease accounting system 1 Does the application support dual reporting? 2 Does the application fully support foreign currency needs? 3 Does it capture items such as variable lease payments, short term leases, the weighted average remaining lease term, or weighted average discount rate to fully support the disclosure requirements? 4 Does it support tracking and recording impairments of ROU Assets? Reassessments? Modifications? 5 6 Will the application or its sponsors be able to provide support for ongoing updates as additional interpretive guidance and best practices emerge over the next few years? Does the application have features that support effective project management and oversight of the accounting change project, which will entail the management of thousands of leases? 18

19 Question and answer session

20 Thank you

21 Contact us Marybeth Shamrock Accounting Change Services Leader and Advisory Leasing Leader KPMG LLP T: E: Shane Hendricks KPMG Leasing Tool Implementation Leader KPMG LLP T: E: Shari Mager Partner, Accounting Advisory Services T: E:

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