The new lease accounting standards have arrived. Are you prepared? Early in 2016, the Financial Accounting Standards Boa
What the FASB and IASB standards mean to your organization and resources to help you navigate them
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LeaseAccounting
The new lease accounting standards have arrived. Are you prepared? Early in 2016, the Financial Accounting Standards Board (FASB) and the International Accounting Standard Board (IASB) both released new lease accounting standards – FASB Topic 842 and IFRS 16. Under these changes, virtually all leases will be put onto the balance sheet and, for those companies that report under IFRS, the P&L treatment for real estate leases will be dramatically different than what we have today. The standard is effective for fiscal years beginning after December15, 2018. For publicly traded companies, there is a financial reporting requirement to report the two preceding years, included ascomparative periods. This effectively means that calendar-year companies will need to be ready for the changes on January 1, 2017.
Reasons for the changes The changes are intended to eliminate one of the largest sources of off-balance sheet financing, and improve comparability and financial transparency.
Who is impacted The new lease accounting standards will impact all companies that have leases (including real estate and equipment) and report under FASB or IFRS. This includes public companies, private entities and non-profit organizations. The changes will most dramatically increase the liabilities reported, and for those companies that rely heavily on leasing for operations such as retailers, restaurant chains, healthcare providers, banks and airlines, there will be significant implications. In addition to impacting a company’s balance sheet and potentially their in-come statement, key financial ratios such as the debt-to-equity and return on assets will be affected.
Virtually, all leases will go onto the balance sheet:
Lessees will recognize a Right-of-Use Asset (ROU) and Lease Liability.
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Under U.S. GAAP, there are no bright line rules for determining a Finance lease vs. an Operating lease. This will increase the level of judgement for Lease Classification.
Under IFRS, there will no longer be Operating leases and straight-line rent. All leases will be Finance leases with a front-end loadedP&L impact, resulting in depressed profits.
Under U.S. GAAP, real estate Operating leases will still exist with the similar straight-line rent we have today. Equipment leases will now be Finance leases, with a front-end loaded P&L impact.
It will be a significant administrative burden for companies to collect the data and calculate the impact for financial reporting.
What you need to know Capitalizing Leases on the Balance Sheet
+
_ –
Fixed Payments (including In-Substance Fixed Payments) Less any Lease Incentives
Performance / Usage Rents
Variable Payments Based on Rate or Index
Non-Lease Components (e.g. Operating Expenses)
x Discount Rate of the Lease or Incremental Borrowing Rate
Cost of Options and Penalties If Reasonably Certain to Exercise Initial Direct Costs
Lease vs. own decisions The criteria for deciding whether to lease or own real estate may be re-examined in the wake of the lease accounting changes. With the new standards, balance sheets will grow for most companies, and the changes will eliminate some of the financial benefits of leasing. Of course, decisions to own or lease properties are based on many more variables than accounting rules alone. Economics, portfolio flexibility, and operational requirements should still be the primary drivers for a lease vs. own decision. However, the new changes could potentially shift the balance toward ownership.
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How to prepare The lease accounting changes are much more than a real estate issue. JLL recommends organizations take the following steps: 1. Establish a cross-functional team (with finance, accounting, real estate, Tax, Treasury, IT, and business units) and create an action plan 2. Get a complete lease inventory or comprehensive lease database to track, document, and account for leases 3. Identify where you have resource, systems, data, and process gaps and develop a plan to address these gaps 4. Quickly understand the implications to your financial statements, key financial ratios and covenant 5. Re-evaluate your methodology for making real estate decisions
Recommended timeline* Ongoing
Preparation and Transition Q4 2017
Q3 2017
Q1 2018
Q2 2018
Q3 2018
Q4 2018
Q1 2019+
Action Plan Development and Implementation Initial / Readiness Assessment Data gathering (lease and non-lease data) Impact Assessment (day one financial impact) Accounting policy assumptions / Tax consideration Financial / leasing strategy System selection and implementation Process development and implementation Develop change management plan Ongoing communication & training DisclosureReporting
Stakeholders RealEstate
Accounting
IT
Tax
Treasury
Investor Relations
BusinessUnit
*For U.S. GAAP organizations. 4
How we can help The intricacies of the revised standards can be overwhelming. We can help you better understand the changes, plan accordingly, reformulate your leasing strategies and provide ongoing lease accounting services once your organization adopts the changes.
Lease Accounting Services Action Plan Development Our lease accounting experts develop a detailed action plan focusing on the activities that need to be accomplished prior to your organization adopting the new accounting standard (“day one”).
Readiness & Impact Assessment An impact assessment informed by our proprietary impact calculator helps you understand the day-one financial implications to your balance sheet and income statement. The goal is to document all of the data necessary to properly account for leases and provide analysis to support your internal accounting policy decisions.
Processes Our process specialists evaluate and refine your existing real estate strategic decision- making, lease administration and transaction processes to ensure they’re aligned with the new standards.
Financial & Leasing Strategy JLL will review and refine your leasing decision making models to complywith the new requirements.
Change Management Our Change Management experts will take a disciplined and structured approach to developing a change management plan, including the development of a training plan and communication materials tailored to ensure the right level of knowledge and awareness at each level of the organization.
LeaseAccounting
Ongoing Lease Accounting Services We can provide the people, processes and technology necessary to conduct ongoing lease accounting activities. Our dedicated team of lease accounting experts will develop and evaluate cash flows and expense schedules, and our integrated lease accounting technology solution links directly to lease data housed in your databases for consistency. Lastly, our clearly defined process of lease accounting procedures ensures strategic changes in your real estate portfolio are captured and analysed for inclusion in your financial statements. 5
Contact us Stephen Miller Global Lease Accounting Lead +1 571 2669775
[email protected]
Michael Billing Americas Lease Accounting Lead +1 312 2282638
[email protected]
Amal El-Maaytah Europe, Middle East and Africa Lease Accounting Lead +48 22 3180035
[email protected]
Sylvia Koh Asia Pacific Lease Accounting Lead +65 64943745
[email protected]
For more information, visit our website www.LeaseAccountingChanges.com
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