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.

Recorded on September 27, 2018 for this timely webinar:

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

September 27, 2018

Note: video recordings of all Bramasol webinars are made available so you may want to check our resource center if you're unable to attend the live sessions.

In 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.

Collateralized 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.

The new lease accounting standard ASC 842 is effective for public companies beginning January 1^st, 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.

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.

On January 5^th, 2018, the Financial Accounting Standards Board (FASB) proposed adding an optional transition method and another practical expedient for lessors to Accounting Standards Codification (ASC) 842, Leases, to reduce the cost and complexity of implementing the new standard.

With the proposed transition option, the FASB is responding to concerns raised by entities, particularly those that plan to implement new systems to comply with the guidance. These entities said that the current requirement to apply the new leases standard to the comparative periods presented in the year of adoption would be more costly and complex for them to implement than the FASB initially anticipated. 

On March 7, 2018, the FASB approved the changes to the comparative reporting transition guidance, providing an optional transition method when adopting Topic 842.

So, what does this mean?

For many companies who recently implemented ASC 606 and used the modified retrospective approach had to recast their financial statements to the earliest periods presented. This meant that they had to go back two years to the earliest reporting period presented and incorporate the changes into the transition entry to retained earnings as the date of implementation.

At its November 29 meeting, the FASB proposed allowing entities the option to instead apply the provisions of the new leases guidance at the effective date (e.g., January 1, 2019), without adjusting the comparative periods presented. In the case of the adoption of ASC 842, if companies were to adopt on 1/1/2019, that means that companies would have to recast fiscal years 2017 and 2018 for the adoption of ASC 842.

For example, a calendar-year entity that adopts the standard on 1 January 2019 and presents two years of comparative financial statements applies the transition provisions on 1 January 2017 (i.e., the beginning of the earliest comparative period presented). Under the proposed transition method, the entity would apply the transition provisions on 1 January 2019 (i.e., the effective date).

Under the proposed new method for transition, companies will be allowed to continue using and presenting operating leasing under ASC 840 and then prospectively adopt ASC 842 on 1/1/2019. The proposal could simplify transition to the new guidance. For example, a lessee would not have to measure and recognize leases that expired prior to the effective date or consider the effects of each modification for leases that were modified more than once during the comparative period presented. Under the proposed transition method, entities could opt to continue to apply the legacy guidance in ASC 840, Leases, including its disclosure requirements, in the comparative periods presented in the year they adopt the new leases standard.

Entities that elect this option would still adopt the new leases standard using a modified retrospective transition method, but they would recognize a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption rather than in the earliest period presented. Entities would still be required to apply different recognition and measurement requirements in the post-adoption period to leases they entered before adoption and those they enter after adoption.

Group of three practical expedients

In addition to the optional relief proposed by the FASB, there was already the “group of three” practical expedients that was previously proposed and approved. The practical expedients apply to all leases in place at the time of transition. However, the practical expedients must be applied as a package.

The practical expedients are:

• An entity need not reassess whether any expired or existing contracts are or contain leases.
• An entity need not reassess the lease classification for any expired or existing leases (that is, all existing leases that were classified as operating leases in accordance with Topic 840 will be classified as operating leases, and all existing leases that were classified as capital leases in accordance with Topic 840 will be classified as finance leases).
• An entity need not reassess initial direct costs for any existing leases.

In addition, the standard provides this practical expedient which may be elected separately from the above:

An entity also may elect a practical expedient, which must be applied consistently by an entity to all its leases (including those for which the entity is a lessee or a lessor) to use hindsight in determining the lease term (that is, when considering lessee options to extend or terminate the lease and to purchase the underlying asset) and in assessing impairment of the entity’s right-of-use assets. This practical expedient may be elected separately or in conjunction with the practical expedients noted above.

Summary:

By the additional optional transition method as well as the practical expedients, companies are being provided with significant relief for the adoption of ASC 842. However, companies that rely extensively on leases for operating assets, the transition is likely to be labor intensive even when applying the practical expedients.

Issued by the IASB (International Accounting Standards Board), IFRS 16 & ASC 842 lease accounting requirements go into effect starting on January 1, 2019. The new standards require extensive reporting detail and have the potential for major impact on companies' balance sheets and income statements. Industry experts advise companies with large lease portfolios to allow significant time in advance of the deadline to identify, compile, and evaluate lease contracts.

For over two years, Bramasol has been at the bleeding edge of Lease Administration execution, helping numerous organizations comprehend and plan for the new evolving benchmarks. The new compliance regulations have a significant impact on how businesses account for their leases.

This video of our recent webinar features a panel discussion by Bramasol’s Center of Excellence (CoE) Experts, who shared “lessons learned” from projects to date.

Key areas covered in this value session are;

• Regulatory changes for Lease Accounting
• Impact of New Standards
• Bramasol’s Lease Administration Solution Engagement Roadmap (LASER) Methodology
• Project Scoping & Security roles
• Data based scenario
• Landscape & Summary discussion

Click Here to View recorded webinar Video in Bramasol Resource Center

We are excited to announce the formation of a new SAP Leasing User Group and pleased to invite you to the first online meeting:
December 5, 2107 at 9 AM PST - 12 PM EST.

The purpose of the Leasing User Group is to bring together SAP, customers and partners in a community to share information on the latest features, roadmap and updates on the SAP Lease Administration by Nakisa (Lease Administration) and SAP Real Estate Management (ReFX) solutions.  

You will hear from the SAP product leaders, Pete Graham and Tom Andersen, as well as, Nakisa and others.   Product experts will be on hand to answer your questions live.

Click Here to Register to Attend the Leasing User Group Kickoff Meeting

In 2016, the International Accounting Standards Board (IASB) and the Financial Accounting Standards Board (FASB) issued new standards for lease accounting: IFRS 16 & ASC 842, which must be implemented by 2019. Both IFRS 16 and ASC 842 are the result of a joint effort between the IASB and FASB to meet the objective of improved transparency, comparability and financial reporting.

These changes will impact virtually all companies, whether lessors or lessees. Regardless of your company's size or industry, under the new standards your balance sheet will be different. 

When putting together your compliance plans for ASC 842 and IFRS 16, it is important to understand that solutions for real estate leases vs. equipment leases require very different features and capabilities.

Real estate leases tend to include specific issues such as tenant improvements, utilities, triple-net expenses, sub-leasing contracts, space utilization tracking, taxes, etc. that are not applicable for equipment leases.

On the other hand, equipment leases have a myriad of potential factors that need to be addressed by lease accounting solutions including, service contracts, maintenance schedules, trade-in options, utilization tracking, re-sale value, etc.

Although the compliance requirements specified in the new standards apply to both real estate and equipment leases, the processes for managing and accounting for these leases need purpose-built solutions.  Some people compare it to choosing the correct bicycle for your planned route.  You wouldn't attempt to navigate a rough mountain trail in a road bike any more than you'd choose a mountain bike to compete in a road race.  Matching the solution to your needs is the best way to achieve success.

That's one reason that, at Bramasol, we have developed deep expertise for implementing and supporting  two purpose-built, best-of-breed, feature-rich solutions: SAP Flexible Real Estate Management (RE-FX) and SAP Lease Administration by Nakisa.  As part of our overall lease administration and accounting initiatives, we have also developed detailed processes for compliance and disclosure reporting for ASC 842 and IFRS 16.

Click here to learn more about Bramasol's Lease Administration solutions and services.

In 2016, the International Accounting Standards Board (IASB) and the Financial Accounting Standards Board (FASB) issued new standards for lease accounting: IFRS 16 & ASC 842, which must be implemented by 2019. Both IFRS 16 and ASC 842 are the result of a joint effort between the IASB and FASB to meet the objective of improved transparency, comparability and financial reporting.  These changes will impact virtually all companies, whether lessors or lessees.

In addition to presenting a new set of challenges that need to be addressed in the near term, the changes in lease accounting also offer an excellent opportunity for companies to make major improvements in their end-to-end lease management practices.

All companies, whether lessors, lessees or both, need to leverage the process of changing their lease management methodologies. This will allow them to gain better visibility of their lease portfolios, streamline the process of lease management and reduce overall costs.

As long-term innovation partners with SAP, Bramasol and Nakisa have brought together a comprehensive set of solutions and expertise to help companies assess and prepare for the new FASB and IASB leasing standards. These solutions unify disparate leasing data and provide enhanced visibility for companies to make informed decisions on their lease portfolios, assets and liabilities while conforming with the new requirements.

This new eBook provides a closer look at the key issues of Scalability, Enterprise Performance and Native Integration that are critical factors for success in implementation of new lease administration processes that maximize compliance, efficiency and extensibility.

Click here to download the eBook on Lease Admin Scalability, Enterprise Performance and Native Integration.

Please join with Bramasol at SAP Financial Excellence Forum October 10-11, 2017 in New York City to learn how top organizations are transforming their financial management processes.

In addition to being available to discuss our industry-leading initiatives in Revenue Recognition, Lease Accounting/Administration and Financial Transformation, Bramasol will be teaming with SAP for the following special presentation on Wednesday, Oct 11, 2017.

Time & Place: October 11, 2017 at 1:30 PM at The Harvard Club, NYC.

Title: " The SEC is watching.  Tips and Tricks for how you can be better prepared for Revenue Recognition (ASC 606/IFRS 15) and Leasing (ASC 842/IFRS16) compliance."

Abstract:

IFRS 15 / ASC 606 (revenue recognition) and IFRS 16 / ASC 842 (leases) are quickly approaching accounting standards requiring offices of the CFOs to implement new accounting software. SAP and Bramasol have been following these accounting standards diligently and has several solutions that help offices of the CFO to enable compliance with IFRS 15 / ASC 606 & 16 / ASC 842.

In 2014, the International Accounting Standards Board (IASB) and Financial Accounting Standards Board (FASB) issued the new International Financial Reporting Standard (IFRS 15 / ASU 2014-09, ASC 606) which specifies the accounting rules for revenue recognition. In order to support our customers to enable compliance with this new standard, SAP has provided a new solution called SAP Revenue Accounting and Reporting (RAR) generally available (GA) since March 31, 2015. With this solution, SAP addresses requirements derived from this new accounting standard as well as generic requirements related to the current revenue recognition standards across various accounting principles.

In 2016, the International Accounting Standards Board (IASB) published IFRS 16 Leases which specifies the accounting rules for leases impacting mainly lessees. SAP solutions provide customers with important information about assets and liabilities arising from operating leases allowing customers to gain full visibility into their lease portfolio. Thus, SAP and Bramasol help our customers get a complete and understandable picture of an entity’s leasing activities.

In a recent conference and speeches, the SEC has indicated it will apply increased scrutiny to disclosures and internal controls (Internal Controls for Financial Reporting)  associated with ASC 606 for Revenue Recognition and ASC 842 for Leasing.  Join our experts from SAP and Bramasol  who will focus on disclosure reporting, building an automated solution, demonstrating critical controls auditors will focus on, and completing the migrations to the new regulation (ASC 606, IFRS 15).    

Learning Objectives for this session:

• See how SAP supports customers by assisting with compliance initiatives relative to IFRS 15 / ASC 606 & IFRS 16 / ASC 842
• Insights and Best Practices based on hands-on experience with real world projects
• Understand Bramasol's Methodologies, Tools and Practical Experience that can get you started now

For anyone involved in Revenue Accounting, Lease Accounting, or Compliance and Reporting this is a must attend session to navigate the complexities and unique challenges of executing a successful project. 

The video of the latest webinar in our series on Financial Transformation is now available for viewing.

"How Financial Transformation Accelerates Expense Management"
Recorded on September 21, 2017

In this webinar video, we address the key benefits of Financial Transformation, which include:

• Single-source-of-truth for predictive and real-time decision-making
• Repeatable & sustainable processes to accelerate closing (monthly, quarterly & annual)
• Improved responsiveness to new regulatory and compliance requirements
• Integration of best-fit applications for key functions (HR, expenses, supply chain, etc.)

Included in this webinar is a hands-on demonstration of how the Digital Core and SAP S/4HANA Cloud can be integrated specifically with SuccessFactors Human Capital Management (HCM) and Concur expense management functions.

Click Here to View all Videos in the Bramasol Financial Transformation Webinar Series.