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New Webinar: ASC 842 Leasing Disclosures: More Than Compliance – Insights To Action

Posted by Bramasol Leasing Administration Team on Mon, Sep 17, 2018 @ 06:07 AM

If you thought ASC 842 Disclosures were just to make the SEC happy, think again. Leveraging Bramasol’s Disclosure reports and analytics on SAP S/4 can provide you with insights into your lease portfolio. Manage costs, understand interest rates and view your portfolios globally so you can have real insights into your leased asset portfolio.

Join us on September 27, 2018 for this timely webinar:

ASC 842 Leasing Disclosures: More Than Compliance – Insights To Action

September 27, 2018 - 10-11 AM PDT - 1-2 PM EDT

Register Here to Attend

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Note: video recordings of all Bramasol webinars are made available to registrants so you may want to register even if you're unable to attend the live sessions.

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Topics: leasing, ASC 842

New eBook: Transitioning to ASC 842 using the Portfolio Approach to Group Leases

Posted by Bramasol Leasing Administration Team on Mon, Aug 13, 2018 @ 11:11 AM

LeaseAdministration-HotTipWith less than five months remaining until January 2019, when public companies have to comply with new leasing standards, ASC 842 and IFRS 16, your implementation plans should already be well underway.

Even if you haven't started yet, there is still a small window of time to have a successful Q1 2019 implementation to enable reporting 45 days after March 31, 2019 - but only if you proactively begin now.

This new eBook from Bramasol's leasing experts drills down for a detailed look at key issues and best practices regarding usage of the Portfolio Approach to implementation of the ASC 842 Lease Accounting Standard.

new ebook on Transitioning to ASC 842, using the Portfolio Approach to Group Leases

This is beneficial by grouping leases of assets in the same class that is comprised assets with similar lease terms and discount rates.An entity may apply the Portfolio Approach to a group of leases within an asset class when doing so does not materially change the financial statement presentation when compared to applying the individual lease methodology.

Key topics addressed in the eBook include:
  • When can an entity apply the Portfolio Approach under ASC 842
  • Application of the Portfolio Approach in determining the Lease Term
  • Application of the Portfolio Approach in the Incremental Borrowing Rate
  • Practical Considerations for the Implementation of Portfolio Approach at Your Company

 

Click below to download the ebook.

Download the eBook: Transitioning to ASC 842 using the Portfolio Approach to Group Leases

 

 

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Topics: Leasing-Hot-Tips, ASC 842

eBook - Real Estate Leases Accounting and Business Considerations for Implementation under ASC 842 / IFRS 16

Posted by Bramasol Leasing Administration Team on Tue, Jul 31, 2018 @ 04:56 AM

In February 2016, the Financial Accounting Standards Board IgnitePossible-HotTip200x130

(FASB) issued Accounting Standards Update (ASU) 2016-02 (“ASC 842”) Leases, which provides new guidelines that change the accounting for leasing arrangements. The new leasing standard becomes effective in fiscal years beginning after December 15, 2018

The primary purpose of the standard is to address the current accounting treatment of operating leases which are deemed to be off balance sheet financing arrangements and are only disclosed via a company’s financial footnotes in the “Commitments and Contingencies” footnote. Upon the adoption of ASC 842, for every identified lease, companies will be required to create a lease liability calculated as the present value of the future fixed payments and a corresponding asset (“right of use” asset).

The right of use asset will be amortized over the life of the lease. The income statement will be impacted by a straight-line lease expense item that would essentially contain an interest component with the amortization of the asset being the plug-in order to achieve straight line lease expense over the life of the lease. One of the key challenges of adopting the new standard will be for companies to assess and apply the incremental borrowing rate applicable to them which will be used in the present value calculations for the capitalization of lease liability and right of use assets related to leases.

The new leases standard will significantly affect lessees and lessors in the real estate industry, including their considerations related to non-lease components, initial direct costs, and accounting for sale- leaseback transactions. In addition, real estate lessors will need to understand the standard’s broader implementation implications for lessees as well as the potential for changes in tenant behaviors.

eBook Real Estate Leases ASC842  IFRS16 TueTip

This eBook also addresses the three most common forms of real estate lease;

  • Net Leases or triple net lease,
  • Modified Gross or Base year Leases and
  • Gross Leases

Lessees and lessors are required to separate lease components and non-lease components (e.g., any services provided) in an arrangement and allocate the total transaction price to the individual components. Lessors would perform the allocation in accordance with the guidance in the new revenue recognition standard, and lessees would do so on a relative stand-alone-price basis (by using observable stand-alone prices or, if the prices are not observable, estimated stand-alone prices).

This eBook will help you explore different accounting treatment for property taxes and insurance, Variable Lease Payments, Initial Direct Costs, Sale-Leaseback Accounting, and at the end best part is Business Impact and Implementation Considerations.

Download the eBook now

As crunch time is here for ASC 842 and IFRS 16 compliance, Bramasol can still help you comply on-time. Ask us how!

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Topics: SAPLeaseAdmin, IFRS16, RLCS, Leasing Solution, ASC 842

Understanding and applying incremental lease borrowing rate analyses under ASC 842

Posted by Julio Dalla Costa on Tue, Jul 17, 2018 @ 04:57 AM

LeaseAdministration-HotTipIn February 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2016-02 ( “ASC 842”), Leases, which provides new guidelines that change the accounting for leasing arrangements.

Background on ASC 842

The new leasing standard becomes effective in fiscal years beginning after December 15, 2018, including interim periods within those fiscal years, for: • Public business entities • Not-for-profit entities that have issued (or are a conduit bond obligator for) securities that are traded, listed, or quoted on an exchange or an over-the-counter market• Employee benefit plans that file financial statements with the US Securities and Exchange Commission (SEC).

For all other entities, it becomes effective in fiscal years beginning after  December 15, 2019, and interim periods in fiscal years beginning after  December 15, 2020. Early adoption is permitted at any time for all entities.

The primary purpose of the standard is to address the current accounting treatment of operating leases which are deemed to be off balance sheet financing arrangements and are only disclosed via a company’s financial footnotes in the “Commitments and Contingencies” footnote. Upon the adoption of ASC 842, Therefore, for every identified lease, companies will be required to create a lease liability calculated as the present value of the future fixed payments and a corresponding asset (“right of use” asset). The right of use asset will be amortized over the life of the lease.

The income statement will be impacted by a straight-line lease expense item that would essentially contain an interest component with the amortization of the asset being the plug-in order to achieve straight line lease expense over the life of the lease. One of the key challenges of adopting the new standard will be for companies to assess and apply the incremental borrowing rate applicable to them which will be used in the present value calculations for the capitalization of lease liability and right of use assets related to leases.

Incremental Borrowing Rate

ASC 842 defines “incremental borrowing rate” as: The rate of interest that a lessee would have to pay to borrow on a collateralized basis over a similar term an amount equal to the lease payments in a similar economic environment.

ASC842 Incremental Borrowing Rate Bramasol tuesday-tip-17JULYCollateralized basis

The definition of “incremental borrowing rate” in ASC 842 represents a change from how that term was defined under ASC 840. The definition under ASC 842 makes it clear that the lessee is required to assess the rate as a secured rate. Under ASC 840, a lessee was to determine a rate that was “consistent with the financing that would have been used in the particular circumstances,” which could have resulted in the lessee using an unsecured borrowing rate.

Accordingly, if a lessee used an unsecured rate to determine lease classification under ASC 840, the adoption of ASC 842 should result in it utilizing a lower discount rate for determining whether the lease qualifies as an operating lease. When combined with other changes from ASC 840, there is a greater chance that leases classified as operating leases under ASC 840 will be finance leases under ASC 842.

Similar term

In determining the incremental borrowing rate, a “one size fits all” will not be sufficient to be compliant with the new standard. Therefore, companies will need to determine the incremental borrowing rate by average lease terms. For example, the incremental borrowing rate applied to a twenty-year lease should not be the same as the rate applied to a three-year vehicle lease.

Similar economic environment

Many companies have asked whether it is possible to use the Company’s corporate cost of capital borrowing rate which is usually is at the company’s headquarters. As noted in the guidance, the incremental borrowing rate will have to applied to similar economic environments so wherein companies have corporate debt at the US headquarters they will be forced to assess and document the differences in rates in different economic environments such as in countries such as China, Brazil, Argentina and some countries in Africa where the economic environments are vastly different than in the Unites States.

Incremental borrowing rate at date of adoption

The incremental borrowing rate should be applied at the date of adoption which for public companies will at 1/1/2019. Companies should start to assess the incremental borrowing rates as early as possible and then update as needed for any changes to the terms and economic environments throughout 2018 so at 1/1/19, there is a clear and precise documentation of the methods used and assumptions made for the various rates.

Private company’s considerations

Because of the difficulty of determining the incremental borrowing rate, ASC 842 also provides a practical expedient to private companies by allowing those reporting entities to use a risk-free rate to determine lease classification. While the risk-free rate is certainly easier to determine than the incremental borrowing rate, the use of the risk-free rate could result in more leases qualifying as finance leases because the present value of the lease payments determined using the risk-free rate will be greater than the present value determined using the incremental borrowing rate. Accordingly, private company lessees will need to carefully consider the implications if they elect to use the risk-free rate.

Conclusion:

As companies start assessing the adoption and implementation, careful consideration of the incremental borrowing will need to perform because of the challenges in the new definition of the incremental borrowing rate under ASC 842. Companies should start having meaningful conversations with their respective treasury departments to determine the various rates that will need to be applied on 1/1/19.

 

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Topics: leasing, Leasing-Hot-Tips, SAPLeaseAdmin, ASC 842

Transitioning to ASC 842, Where are all your company’s lease documents?

Posted by David Ogletree on Tue, Jul 10, 2018 @ 02:33 AM

LeaseAdministration-HotTipThe new lease accounting standard ASC 842 is effective for public companies beginning January 1st, 2019. The primary purpose of the standard was to address the fact that most operating leases are deemed off balance sheet financing arrangements and currently are only disclosed via a company’s financial footnotes in the “Commitments and Contingencies” footnote.

Therefore, for every identified lease, companies will be required to create a lease liability calculated as the present value of the future fixed payments and a corresponding asset (“right of use” asset). The right of use asset will be amortized over the life of the lease. The income statement will be impacted by a straight-line lease expense item that would essentially contain an interest component with the amortization of the asset being the plug-in order to achieve straight line lease expense over the life of the lease.

Primary issue is locating the entire population of active leases

Since companies were not required to capitalize leases in the past, record keeping for leases were often decentralized.  Most companies did not ever require operating leases to go through a formal capital committee review.  This meant record keeping and leasing terms were often undocumented.  The leasing related companies often transfer(sell) existing leases in their portfolio to other leasing companies making it even more difficult to track down leases.  The new standard is forcing companies to go through the process of locating all their operating leases.  For many firms this is an onerous task as some leases are decentralized and managed by their subsidiaries.  The following is a course of action to gather all the leases for an entity for ASC 842 accounting determination.

These five required steps to completeness and determination will help make sure that all leases have been analyzed for proper ASC 842 adoption.

Make sure all leases have been analyzed for proper ASC 842 adoption_tue-tip-10JUL

1) Commitments and Contingencies Footnote Schedule

Even though companies were not required to account for their operating leases on their balance sheet under ASC 840, there were required footnote disclosures.  The operating leases for future periods were disclosed in the “Commitments and Contingencies” section of their 10-K filings.  This disclosure would serve as a starting basis for all active operating leases.  The footnote would most likely contain a schedule of all future annual lease payments, lease terms, and minimum required lease payments. This schedule would be the beginning basis for the master lease schedule.

2) Leasing/Legal Department Inquiries

Some very large or lease centric companies have a Leasing department.  The Leasing department would likely have a listing of all approved leasing companies and all related contact information. The Leasing department would be the starting point of all lease negotiations and final lease execution. Inquire with leasing management as to their current active lease files.  This population of leases discovered in your initial inquiry of leasing management should detect leases not included in the “Commitments and Contingencies” footnote disclosure.  The Legal department is also a key contact regarding leases(and contracts) to make a formal inquiry.  The Legal department reviews, negotiates, and approves all legal documents.  The Legal department would keep a repository of all approved and executed legal documents.  Access to this contract repository will aid in the detection of “embedded leases”.  Embedded leases are leases under ASC 842 that are within a services contract not currently accounted for as an operating lease and therefore not included in the “Commitments and Contingencies” footnote.   

3) AP Sub-Ledger Analysis

As the company continues to navigate ASC 842 adoption, for completeness purposes, all payments in the AP sub-ledger in the trailing twelve months should be reviewed. These payment records should be reviewed in detailed for any vouchers that might relate to a lease and was not present in the 10-K or the Leasing/Legal department contract files.  Companies should query their detailed AP data for key words such as “lease”, “rent”, “building”, “equipment” and the like.  It would also be prudent to query the AP data for the entity’s common lease related vendors.   The leasing company vendor list would have been provided by Leasing management or AP management.  All leases detected through the AP sub-ledger should be matched against the list derived from the prior lease detection efforts.  All unmatched leases should be added to the original list to continue building the master lease schedule.  The next step in the AP analysis is reviewing payment files for any monthly recurring payments.  Trace these recurring payments to the AP voucher and compare to the master lease schedule.  Any voucher that is recurring and not already included on the master lease schedule would require further analysis to determine if it is indeed a lease. If the payment relates to a service contract, review the contract in the files of the Legal department, as discussed earlier to determine if there is an embedded lease.

 4) GL Detail Analysis

Next, a detailed listing from the general ledger for the rent expense account(s) should be examined and compared against the list derived from the all the previous lease detection efforts.  This is to detect payments or reclasses that are lease related but outside the AP sub-ledger.  This process may reveal wire transfers related to a lease or transactions that are lease related but not detected by the prior lease detection steps.

A detailed listing of the general ledger for property tax and insurance expense should also be examined and compared against the data derived from the previous inquiries.  This listing may detect property taxes and insurance expense for net leases not otherwise accounted for in the prior steps.

5) Treasury Department inquiry

All wire transfer payments should be reviewed for any payments that might relate to a lease.  Treasury departments routinely wire transfer large rent payments, especially related to leased real estate due to the exorbitant late fees charged in standard rental agreements. 

It would also be prudent to review the operating bank statement for wire transfers posting towards the end of the month that might relate to a lease. These wire transfers can be traced back to the wire transfer request documentation to determine if the payment is lease related.

Summary

As companies move through these steps to finalize their entire lease population, it is advisable to return to the Leasing and Legal department with the leases discovered that were not included in their original Leasing and Legal department inquiry.  This will allow these departments to update their corporate files and better manage the lease administration process.  The Leasing Department in collaboration with the Corporate Accounting department, may want to consider having a central repository software program for all the company’s leases, terms, minimum required lease payments, etc.  This will aid the Accounting department on a going forward basis as all new leases will be required to be analyzed for proper ASC 842 lease adherence. It will also allow for much stronger internal controls surrounding the leasing environment, and consequently, more accurate financial reporting.

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Topics: leasing, Leasing-Hot-Tips, IFRS16, ASC 842

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