CBIZ MHM Executive Education Series How NotforProfit Organizations

CBIZ & MHM Executive Education Series™ How Not-for-Profit Organizations Can Prepare for the New Leasing Standard Heather Winiarski & Allan Klose May 30, 2019 Questions? Email cbizmhmwebinars@cbiz. com 1

About Us • Together, CBIZ & MHM are a Top Ten accounting provider • Offices in most major markets • Tax, audit and attest and advisory services • Over 2, 900 professionals nationwide A member of Kreston International A global network of independent accounting firms MHM (Mayer Hoffman Mc. Cann P. C. ) is an independent CPA firm that provides audit, review and attest services, and works closely with CBIZ, a business consulting, tax and financial services provider. CBIZ and MHM are members of Kreston International Limited, a global network of independent accounting firms. Questions? Email cbizmhmwebinars@cbiz. com 2

Before We Get Started… • Use the control panel on the right side of your screen to: • Change your audio mode • Submit questions • Download handouts • If you need technical assistance: • Call support at 877 -582 -7011 • Email us at cbizmhmwebinars@cbiz. com Questions? Email cbizmhmwebinars@cbiz. com 3

CPE Credit This webinar is eligible for CPE credit. To receive credit, you will need to answer polling questions throughout the webinar. External participants will receive their CPE certificates via email within 15 business days of the webinar. Questions? Email cbizmhmwebinars@cbiz. com 4

Disclaimer The information in this Executive Education Series course is a brief summary and may not include all the details relevant to your situation. Please contact your service provider to further discuss the impact on your business. Questions? Email cbizmhmwebinars@cbiz. com 5

Presenters Located in our Kansas City office, Heather has experience in public accounting primarily serving the real estate industry. She is a member of MHM’s Professional Standards Group, providing accounting knowledge in the area of lease accounting. In this role, Heather consults with clients and engagement teams, writes accounting publications, develops internal content, and teaches webinars and in-person courses. 816. 945. 5168 • hwiniarski@cbiz. com • @Mc. Wini. CPA HEATHER WINIARSKI, CPA MHM Shareholder Questions? Email cbizmhmwebinars@cbiz. com 6

Speaker Allan is a shareholder with Mayer Hoffman Mc. Cann in the Phoenix office and is a key member of our not-for-profit industry practice group. Allan spends a substantial portion of his time serving not-for-profit organizations. Allan has extensive experience assisting clients with a variety of accounting issues including revenue recognition and the reporting of endowments. Allan is the Phoenix Office representative on the Firm’s National Lease Implementation Group. The group is currently focused on helping private companies and not-for-profit organizations Allan C. Klose, CPA CBIZ Managing Director MHM Shareholder Phoenix Office Questions? Email cbizmhmwebinars@cbiz. com with the implementation of Topic 842. 602. 650. 6272 • aklose@cbiz. com 7

Agenda 01 Big Changes Ahead 02 Considerations for Transitioning 03 Other Items 04 Questions? Email cbizmhmwebinars@cbiz. com 8

BIG CHANGES AHEAD Questions? Email cbizmhmwebinars@cbiz. com 9

Key Changes • Most leases will be recorded on the balance sheet • Expanded disclosures • Principles-based standard Questions? Email cbizmhmwebinars@cbiz. com 10

Operating Lease Example Future Minimum Lease Payments 20 x 1 $110, 601 20 x 2 $112, 212 20 x 3 $114, 290 20 x 4 $116, 368 20 x 5 $118, 446 Total $571, 917 New Asset & Liability $523, 297* *Assumes a 3% discount rate on end of year payments Questions? Email cbizmhmwebinars@cbiz. com 11

Example Covenant • “Debt Service Coverage Ratio” shall mean the ratio of (a) Borrowers’ • total debt (i. e. interest expense on all indebtedness of Borrowers plus all long term indebtedness of Borrowers) to (b) Borrowers’. Change in Net Assets before interest and depreciation INDEBTEDNESS. The word "Indebtedness" … means all of the principal amount outstanding… arising from any and all debts, liabilities and obligations of every nature or form, now existing or hereafter arising or acquired, that Borrower individually or collectively or interchangeably with others, owes or will owe Lender. "Indebtedness" includes, without limitation, loans, advances, debts, overdraft indebtedness, credit card indebtedness, lease obligations…, other obligations, and liabilities of Borrower, and any present or future judgments against Borrower… Questions? Email cbizmhmwebinars@cbiz. com 12

Example Covenant Continued • Debt Service Coverage Ratio. Borrowers shall not permit their Debt Service Coverage Ratio to exceed 3. 5 to 1. 0, which covenant shall be measured annually based on the Borrowers’ annual audited Financial Statements. Current Guidance Operating Lease New Guidance Finance Lease Interest 49, 550 Debt 1, 238, 757 Total 1, 288, 307 ΔNAID 466, 923 Interest 49, 550 Debt 1, 667, 152 Total 1, 716, 702 ΔNAID 466, 923 Interest 65, 249 Debt 1, 667, 152 Total 1, 732, 401 ΔNAID 581, 306 2. 76 3. 68 2. 98 Questions? Email cbizmhmwebinars@cbiz. com 13

CONSIDERATIONS FOR TRANSITIONING Questions? Email cbizmhmwebinars@cbiz. com 14

Two Sets of Dates • Effective Date • Public business entities: Fiscal years beginning after December 15, 2018 • Includes NFPs that are conduit bond obligors • All others: Fiscal years beginning after December 15, 2019 • Earlier application is permitted • Date of Application • Beginning of the earliest comparative period presented • Beginning of the reporting period in which the organization first adopts the new standard Questions? Email cbizmhmwebinars@cbiz. com 15

Transition Practical Expedients • Package of practical expedients for expired or existing contracts • Not reassess whether contracts contain a lease • Not reassess lease classification • Not reassess initial direct costs • Hindsight for lease term and impairment of the rightof-use asset • Not reassess existing or expired land easements not accounted for under previous lease guidance Questions? Email cbizmhmwebinars@cbiz. com 16

Lessee Basic Transition (Assumes the practical expedients are elected) ASC 840 Capital Lease Asset Capital Lease Obligation ASC 842 Right-of. Use Asset Lease Liability Existing Capital Lease Questions? Email cbizmhmwebinars@cbiz. com ASC 842 Lease Liability • Based on remaining rental payments and probable residual value guarantee using discount rate from the application date Right-of -Use Asset • Lease liability adjusted for prepaid or accrued rent, incentives, unamortized IDC, impairment, and disposal obligations ASC 840 Existing Operating Lease 17

An Overall Process Does the contract contain a lease? Reassessments & modifications What are the components of the contract? What is the lease classification? What is the accounting treatment? Questions? Email cbizmhmwebinars@cbiz. com 18

Definition of a Lease • A contract contains a lease if it conveys the right to control the use of an identified asset for a period of time in exchange for consideration • Right to control the use • Obtain substantially all of the economic benefits • Direct the use of the asset • Identified asset • Implicit or explicitly stated • No substantive right of substitution Questions? Email cbizmhmwebinars@cbiz. com 19

Components of the Contract • Components of a contract include only those items or activities that transfer a good or service to the lessee. • Separating lease components • Lessee can benefit from the right of use on its own or with other readily available resources and right of use is not highly dependent or interrelated with other rights • Accounting policy election to not separate nonlease components from its related lease components • Allocating consideration • Determine total consideration in the contract • Determine relative standalone price bases • Contract combination guidance Questions? Email cbizmhmwebinars@cbiz. com 20

Some Lease Definitions • Lease commencement vs inception • Lease payments • Includes variable payments dependent on a rate or index • Initial direct costs = narrower definition • Discount rate • Rate implicit in the lease • Incremental borrowing rate • Risk-free rate (nonpublic lessees only) Questions? Email cbizmhmwebinars@cbiz. com 21

Lease Classification Transfer of Ownership Purchase Option that is Reasonably Certain to be Exercised PV of Payments + Residual Value Guarantee by the Lessee is Substantially All of Fair Value Underlying Asset is of Specialized Nature Lease Term is for Major Part of Remaining Economic Life Questions? Email cbizmhmwebinars@cbiz. com 22

Government Lessor Considerations • Classify as an operating lease if • Impractical to determine fair value of the asset • Underlying asset • is owned by a governmental unit or authority • part of a larger facility operated by or on behalf of the lessor • part of a permanent structure that could not normally be moved • or equivalent asset in the same service area cannot be purchased or leased from a nongovernmental unit • Lessor has explicit right to terminate the lease at any time • Lessee cannot acquire ownership of the underlying asset Questions? Email cbizmhmwebinars@cbiz. com 23

Lessee Accounting Treatment Short-tem Lease Operating Lease (Election: ≤ 12 months) • Straight-line rent liability • Lease expense (straight-line) • Cash paid for lease payments B/S I/S C/F Finance Lease (No criterion met) (At least 1 criterion met) • Right-of-use asset • Lease liability • Lease expense (straight-line) • Cash paid for lease payments Questions? Email cbizmhmwebinars@cbiz. com B/S I/S • Amortization expense • Interest expense C/F • Cash paid for principal and interest 24

Presentation Considerations • Financial statement presentation • Line items for the operating and finance lease right-ofuse assets and lease liabilities • Current vs long-term • Disclosure requirements • General information • Total lease cost segregated by the various types • Weighted average remaining lease term and discount rate • Cash flow information • Maturity analysis Questions? Email cbizmhmwebinars@cbiz. com 25

OTHER ITEMS Questions? Email cbizmhmwebinars@cbiz. com 26

Reassessments and Modifications • Processes to track • • When terms and conditions of a contract change Changes in lease term Changes in the assessment of a purchase option Potential impairment triggers • Lease modifications • Additional right-of-use asset is priced commensurate with its standalone price Questions? Email cbizmhmwebinars@cbiz. com 27

Lessee Involvement in Construction (Build-to-Suit) Lessee recognizes the entire construction project Lessee Does Not Control the Asset Control Lessee records prepaid lease payments Questions? Email cbizmhmwebinars@cbiz. com Lessee Controls the Asset 28

Sale and Leaseback Accounting • Determine whether a sale has occurred • under the new revenue recognition standard (Topic 606) A sale is precluded if • The leaseback is classified as a finance or sales-type lease, or • The seller-lessee has a repurchase option unless the option is only exercisable at then-prevailing fair market value and the leased asset is non-specialized • If a sale has occurred, the sale should be recorded in accordance with Topic 606 (with gain or loss recognized in income immediately) and the leaseback in accordance with this Topic 842 Questions? Email cbizmhmwebinars@cbiz. com 29

Key Changes for Lessees • Most leases will be recorded on the balance sheet • Bright-lines are eliminated for lease classification 2020 2019 • More robust disclosures • 30 are required • Lease consideration is allocated between various lease components based on relative standalone prices • Executory costs (taxes and insurance) are considered to be lease payments Effective for nonpublic calendar year-end companies on December 31, 2020 Questions? Email cbizmhmwebinars@cbiz. com 30

Steps to Take • Inventory your leases • Evaluate systems, processes and controls • Consider estimates • Examine other agreements impacted • Don’t delay Questions? Email cbizmhmwebinars@cbiz. com 31

? QUESTIONS Questions? Email cbizmhmwebinars@cbiz. com 32

If You Enjoyed This Webinar… Upcoming Courses: • 6/11: Key International Tax Development Update Q 2 • 6/12: Top 10 Common Errors in Valuation • 6/25: Oddities in Leasing: Don’t Let These Provisions Be the Odd Thing Out of Your Implementation Plan • 7/9: Second Quarter Accounting and Financial Reporting Issues Update Recent Publications: • Small Public Companies May Be Granted Audit Reprieve • How the New Credit Loss Standard Affects M&A • How Private Equity and Venture Capital Firms Can Improve Their Internal Tax Processes • Make Your Audit Committee Meaningful Again Questions? Email cbizmhmwebinars@cbiz. com 33

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