FASB Lease Accounting - CoStar Real Estate Manager · Current Lease Accounting Standards...

FASB Lease Accounting:

The Next Great Adventure

Presented by:

Mark McDonald, CoStar Real Estate Manager

© Copyright CoStar Realty Information, Inc. All Rights Reserved.

888.823.3209 | costarmanager.com

New Lease Accounting Standard

“Real estate used to be fun, but now we have

to deal with the accountants…”

-Anonymous



Agenda

• Timing

• Intent

• Balance Sheet Impact

• Company Impact

• Real Estate Impact

• Managing the Transition



Timing



How we got here…

• FASB vs. IASB

• Many years of convergence towards the common greater

good• US GAAP and IFRS Standards

• 15+ years of work

• Remaining work:• Revenue Recognition

• Lease Accounting

• Financial Instruments

• Insurance



FAS 13 – 11/76

Final Standard Issued – 2/16

Timeline – Lease Accounting

Joint Convergence Project – 9/02

Discussion Draft – 3/09

Public Comments – 7/09

Exposure Draft – 8/10

Comments/Outreach/Additional Consideration

2010 -2013

Re-exposure Draft – 5/13



The FASB Changes are Here!



Compliance Timeline

2016 2017 2018 2019

Current Lease

Accounting

Standards

Preparation, Policy,

Data, Systems, Process,

& Delivery

Comparison

Reporting

Period

New

Standards

FASB ASC 840 (US GAAP) / IAS

17 (IFRS)

Income Statement

Balance Sheet

FASB ASC

842 &

IFRS 16

Plan & Implement Policy, Data,

Systems, Process



Intent



New Leasing Standard - Intent

• Identify and quantify invisible assets and liabilities

• Measure the economic position of a company

when it obtains access to capital in the form of a

lease



Balance Sheet Impact



FASB – Balance Sheet Impact Example

An example:

• $10,000/month = $120,000/year



An example:

• $10,000/month = $120,000/year

• 15 Year term – 10 year base term, One 5 year option

–15 years = $1,800,000

FASB – Balance Sheet Impact Example



Balance Sheet Impact – Initial Recognition

• 15 year lease with $10,000 payments:

– = $120,000/ year

– = $1,800,000 total payments

• Discounted at 5% = $1,264,552 * 100 leases =



Balance Sheet Impact – Company Examples

• Assumptions:

– Use operating lease commitments as of publicly available FY 2015

annual reports

– Apply 5 % discount rate

– Not factoring in renewal / termination options



Balance Sheet Impact– Corporate Examples

$884M $363M

$11.8

B

$13B

3% of Total Assets

3% of Total Assets 21% of Total Assets

27% of Total Assets

12% of Total Assets

<1% of Total Assets

$1.2B

$297M



Balance Sheet Impact– Retail Examples

$2B

154% of Total Assets

$6.9B

$3.1B$2.1B

30% of Total Assets 82% of Total Assets 33% of Total Assets

61% of Total Assets 156% of Total Assets

$373M$707M



…the Rest of the Story

Estimated to have an impact of

$2 Trillion

On Corporate Balance Sheets

Source: Wall Street Journal - November 10, 2015



Company Impact



Company Impact

• Debt covenants

• Impact to financial metrics

• Regulatory capital for banks

• Expenses charged to business units may change

significantly

• Minimal changes to credit ratings / borrowing costs

• Additional burden on strained resources to manage

transition and ongoing regulatory reporting



Real Estate Impact



FASB – Business Impact

“Accounting for a lease should never get in

the way of a sound economic decision”

-PWC



Lease vs Buy



Lease when…

• Need for flexibility

• Long term needs hard to determine

• Multiple alternatives to space are accessible

• Alternative financing options are limited or too expensive



However…Single tenant occupiers

• Perceived accounting advantages to leasing no longer exist

• Intermediate initial term + renewal option may result in re-

classification (finance lease)

• Cost of capital is more important than rent/SF

• Effective cost per year - could be cheaper to purchase



Impacts to lease negotiations?

Alternative lease structures - Corporate

• Net lease vs gross/modified gross

• CPI increases

Alternative lease structures - Retailers

• Contingent rent

Length of lease term / options

• Pricing implication of longer term?



Managing the Transition



Policy

Data

Systems

Process

FASB – Managing the Transition



• Transition team• Accounting

• Finance

• Real Estate

• Business

• Engaging your audit partners

• Determining treatments for…• What is a lease? What type?

• Discount rate

• Lease term

• % of Economic life

• % of FMV

• Re-measurement

FASB – Setting Policy



A contract that includes:

• A specific asset:

• Explicitly or implicitly identified

• Does not provide for substitution

• Control of the use of that asset:

• Decision making authority over the use

of the asset

• Ability to obtain substantially all economic benefits from the

use of the asset

FASB Policy - Is it a Lease?



• Finance Lease (Does it meet any of the following):

• Transfer of ownership

• Option to purchase is reasonable certain

• Lease term is a “major part” of the economic life

• Present value of lease payments is “substantially all” of the

fair value

• Specialized nature

• If the lease meets any of the above, it is a Finance Lease

• If not, it is an Operating Lease

• Operating Lease

• IASB/IFRS - One type of lease (finance only)

FASB Policy - Types of Leases:



• New, subjective test that will must be applied

consistently

• New lease term will include non-cancellable

portion of the lease + option periods that are

“reasonably certain” to be exercised.

FASB Policy - Options



• Term of lease changes (early renewal / blend + extend / etc.)

• Options is exercised (or not) that was not initially assumed

• Asset / Liability are re-calculated

• Discount rates and rent index assumptions are re-evaluated

at the time of re-measurement

FASB Policy – Re-measurement



Policy

Data

Systems

Process




Where are my leases?

Data Capture



Inventory - Non-Real Estate

• The FASB changes will include non-real estate leases

– Lots more of them

– Not usually centralized

– Difficult to assemble a complete inventory

– Not as much in $$$$ as RE

– Just have to be over 12 months



• Lease possession / commencement

• Lease term (including options)

• Payments – fixed vs. variable

• Direct cost

• Discount rate

• Fair value

• Economic Life

• Lease Allowances

• Termination Option Penalties

Data considerations



Getting The Information In

• Accurately

• Easily

• Consistently



Like-Kind Leases



Profiles

• For like-kind leases, much of the lease recognition data and

decisions will be the same. Saving these decisions and data into

a reusable profile will streamline lease recognition and increase

accuracy and consistency…like RE, Forklifts, Tractors/Trailers,

Cars, etc.



Profiles – Like-Kind Attributes Of Leases

• General Ledger Accounting Distribution

• Projected Growth

• Direct Costs

• Frequency of Reviews

• Type of lease re: Amortization Method

• Discount Rates

• Exercise of Options Assumptions



Non-Real Estate Leases

• One System to ALL leases

• This requires non-real estate leases unique attributes:

– Useful life

– Residual value

– May explicitly state finance rate



Things for consideration

• Preparation ease

• Non-real estate

• Consistent, accurate and speedy data entry

• What-if analysis

• Early results

• Advance knowledge of the financial impact

• Reusability

• Single Source



Policy

Data

Systems

Process




Managing the Transition - Software



System Calculations

• Classification Test

• Initial Asset / Liability Balance

• Monthly Amortization

• Asset amortization

• Liability Reduction

• Lease Level Expense

• Interest

• Monthly workflow status for integration



System Calculations – SL Rent



System Calculations – 842 Operating



System Calculations – IFRS



Testing Scenarios

• Leases with/without escalations

• Free rent period

• Full month vs partial month payments (proration)

• TIs / Construction Allowance

• Renewal Options

• Modified retrospective reporting

• Mid-term termination

• Co-tenancy

• Percentage Rent

• CPI or other indexed leases

• Lease Admin -> Lease Accounting workflow

• Flexibility to meet accounting interpretations



AP Export

GL

AP (Vendors)

Lease

Administration

& Accounting

Software

Open System With Integrations

Reporting ReportingIn

te

gr

atio

n

Inte

gr

atio

nBanking /

Treasury

Fixed Asset

AP (Check

History)

Risk Mgt

Asset Tracking



Policy

Data

Systems

Process




Ongoing Process

• Who owns this going forward?

• What does the handoff between real estate and

accounting look like?

• A lease is executed…now what?

• A lease is amended…now what?

• A lease is impaired

• A co-tenancy violation occurs

• Etc.



Where to start?

• Review current systems used to manage all leases

• Review current documentation of policies, procedures and

work flows

• Review current documentation for critical data management

and reporting

• Audit inventory of document and data records for completeness

and accuracy

• Gap assessment of the current state of data against new data

standards recommended for compliance

• Abstracting and auditing relevant data elements

• Entering and updating calculation profile data

• Defining and documenting instructions for ongoing compliance



FASB Readiness Timeline

Understand obligation & impact

Preparation for transition

Implementation, restatement

Ongoing management

Goal: What is my obligation?

Goal: Data readiness, focused resources

Goal: Smooth transition

Goal: Efficient, auditable

processes

New FASB

Data Fields

Estimated the

Impact



FASB Recap

• Stressed out?

• Feeling unprepared?

• Feeling uncertain regarding the impact?

• You’re feeling FASB’d?



• Balance sheet impact varies by company / industry

• Identifying areas of company impact and sharing that with

leadership

• Monitor impact of deal structure and real estate strategy

• Creating a team internally to manage policy, process and

transition

In conclusion…



Contact Information

Mark McDonald

Director of Sales

CoStar Real Estate Manager

[email protected]

888-709-5088

mailto:[email protected]

FASB Lease Accounting - CoStar Real Estate Manager · Current Lease Accounting Standards...

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