Ready or Not, Here Come the New Lease Accounting …sig.org/docs2/WS02_Ready_or_Not_Here_Come_the_Ne… · · 2017-03-13Nearly all leases go on the balance sheet as Right of Use

Ready or Not, Here Come the

New Lease Accounting

Standards

JLLMichael BillingManaging Director

Global Lease Accounting Lead

sig.org/summit

http://www.sig.org/eval

Ready or notHere come the new lease accounting standardsMichael BillingManaging DirectorGlobal Lease Accounting Lead

© 2017 Jones Lang LaSalle IP, Inc. All rights reserved. 3

About JLL

To be the first choice in

corporate real estate services

and outsourcing solutions

Improve

productivity

Offer the best

scalable solutions

Deliver by industry

sector and service

Deliver locally,

regionally and globally

Our goal Our mission

• Professional services firm that specializes in real estate and investment management

• Helps real estate owners, occupiers and investors achieve their business ambitions

• Fortune 500 company• Revenue of $6.8 billion and fee revenue of $5.8 billion • On behalf of clients, manages 4.4 billion square feet and completed sales

acquisitions and finance transactions of approximately $136 billion last year• Nearly 300 corporate offices, operations in over 80 countries and a global

workforce of more than 77,000


Today’s discussion

Lease accounting

changes overview

Impact on real estate

and equipment

leases

How to prepareImplications for

procurement

Leasing strategies


Poll QuestionHow familiar are you with the lease

accounting changes?

• What on earth are you talking about?

• I’ve heard about the changes and know a little

bit about them

• I know just enough to be dangerous

• I wrote the book on lease accounting


Lease accounting changes

US GAAP ASU 842 & IFRS 16

Operating leases reflect lease

expense on a straight-line

basis (US GAAP only)

Finance leases reflect a front-

loaded expense pattern

Nearly all leases go on the

balance sheet as Right of Use

asset and Lease Liability

All leases not subject to

exemptions are treated as

finance leases under IFRS


Capitalization

Fixed Payments (including In-

Substance Fixed Payments) Less

any Lease Incentives

Variable

Payments

Based on Rate or

Index

Cost of Options &

Penalties

If Reasonably Certain to

Exercise

Initial Direct

Costs*

Performance/Usage Rents

Non-Lease Components

(e.g. Operating

Expenses)

Discount Rate of the Lease or Incremental Borrowing

Rate

Right-of-Use Asset

Lease Liability

Include

Exclude

Apply

Present

Value

* Initial direct costs are included only in the determination of ROU Asset


Timing

2017

Comparative

Period

2018

Comparative

Period

2019

Effective

Date

U.S

. G

AA

P

Modified Retrospective Approach

Full Retrospective Approach

Modified Retrospective Approach

RestateApply New

Standard

Restate &

One-Time

Equity

Adjustment

Apply New

Standard &

One-Time

Equity

Adjustment

No Restatement – Impact on

Comparative Periods

Disclosed in Footnotes

RestateApply New

Standard

Restate &

One-Time

Equity

Adjustment

IFR

S


Key decisions to be made

When will the new

standards be adopted

and when do you want to

be prepared?

Adoption

What technology will be

used to facilitate the new

requirements?

Technology

Who will perform the

lease accounting

activities?

Team

What transition

expedients will be

adopted?

Transition

Where will non-lease

data come from?

Data

How should decision-

making change?

Decisions


Equipment vs. real estate leases

Real estate leases

• Management is often centralized

• Data is often housed in databases

• Single lease, single asset

• Assets are easily validated

Equipment leases

• Management is often decentralized

• Data is often housed in spreadsheets, at best

• Single lease, multiple assets

• Assets are often difficult to validate

• 80% of U.S. companies lease some or all of

their equipment


Impact on decision-making

50%

39%

11%

Lease vs. buy strategy will change

No

Unsure

Yes

39%

44%

17%

Will seek shorter lease durations

No

Unsure

Yes

28%

28%

44%

Decision-making process will change

No

Unsure

Yes

16%

67%

17%

Plan to seek more CRE leases excl. OpEx

No

Unsure

Yes


Optimizing the outcomes

Financial Alignment and Optimization (FAO©): A consistent, systematic, consensusbased decision making process for evaluating real estate financing options in ways that aremeaningful to senior management, shareholders, stock analysts and credit rating agencies.

Objectives

Accounting

and Tax

Strategic

Investments OperationsCredit Rating Agencies

& Stock Analysts ShareholdersCorporate

Real Estate Treasury

Stakeholders Decision

Satisfy

Business Unit

Requirements

Maintain

Credit Quality

Maintain

Maximum

Operating

Control

Maximize

Shareholder

Value

Earnings Per

Share Benefit

Minimize

Balance Sheet

Impact


Lease vs. own factors

Single vs. multi-tenant

Security

Ability to renovate

Decision flexibility

Rent exposure

Exit strategy

Future obsolescence

Technology changes

Capital redeployment

Cost of capital

P&L impact

Continued investment

Tax impact

Balance sheet metrics

Timing

Ability to grow or contract

Location drivers

Technical specifications

Real estate market

dynamics

Capital markets

Investor interest in

asset type

Business

Needs

Risk

Control Financial

External

Factors


Sale & leasebacks

ASC Topic 606

Existence of a Contract

Control of the Asset

Determine

whether a

sale has

occurred

1

ASC Topic 842

Lease Classification

Same

treatment

as other

leases

2

ASC Topic 606

Gain/Loss Recognition

Gains &

losses

recognized

immediately

3


Build-to-suits

Control as opposed to risk

• Lessee degree of control during

construction period

• Control means ownership during

construction period

• Deemed ownership subject

sale-leaseback

Lessee flexibility improved

• Control standard less restrictive than

risk standard

• Derecognition at lease commencement

less difficult

• Lessee has abundance of flexibility

Topic 842 eliminates current build-to-suit guidance; now lessee deemed owner when control

is gained prior to the lease commencement


Poll QuestionHave you been involved in sourcing or RFP discussions about putting a lease

accounting solution in place?

• Yes – we’re all over it

• We’ve started the discussion but haven’t

initiated anything formal yet

• Not yet – but it’s on our radar


Procurement considerations

Technology

People

Process


People and process considerations

Prepare lease

accounting variance

reports for approval

Variance Reports

Perform initial measurement

and reassessments activities

Data

Run month-end lease

accounting process

Measurement &

Reassessment

Manage forecasting

(quarterly and annual)

requirements

Forecasting

Collect data required for

lease accounting and input

into Lease Accounting Tool

Process

Prepare and validate cash

flow and lease accounting

calculations

Prepare &

Validate

Prepare journal entries and

reporting for approval

Journal entries &

reporting

Variance Reports

Journal Entries &

Reporting

• Integrate lease administration data into

calculations

• Include configuration of costs & event types

• Permit both IFRS & US GAAP reporting for the

same lease

• Allow for Operating vs. Finance lease

classification

• Accommodation of real estate and equipment

leases

• Permit input of incremental borrowing rates (IBR)

rates


Technology selection considerations

Key lease accounting

technology providers

• Allow data tracking where options are reasonably

certain to be exercised

• Permit re-assessment upon “triggering events”

• Include initial direct costs, incentives, penalty &

purchase costs

• Provide detailed financial schedules at the lease

level

• Include security roles to segregate lease

administration & accounting user activity

• Allow export and upload of detailed journal entries

to ERP system


Technology selection considerations (cont’d)

Key lease accounting

technology providers


Preparation plan

Stakeholders

Real Estate Accounting IT Tax TreasuryInvestor

Relations

Business

Unit

Preparing for Day One Transition Ongoing

2017-2018Now 2019+

Project launch & action plan

development

Abstract additional lease data (as required)

Collect non-lease data

Implement Lease Accounting Tool

Populate Lease Accounting Tool & Test

Review & refine financial models

Evaluate & refine current processes

Evaluate & refine strategic decision making

Evaluate & refine lease structures and tenures

Develop and execute change management plan

Run & review Day One

journal entries

Conduct impact assessment


QuestionsMichael BillingManaging Director | Global Lease Accounting Lead

[email protected]

(312) 228 2638

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Michael BillingManaging Director | Global Lease Accounting [email protected](312) 228 2638

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Ready or Not, Here Come the New Lease Accounting …sig.org/docs2/WS02_Ready_or_Not_Here_Come_the_Ne… · · 2017-03-13Nearly all leases go on the balance sheet as Right of Use

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