CBIZ MHM Executive Education Series How Will New
CBIZ & MHM Executive Education Series™ How Will New Revenue Recognition & Leasing Standards Affect the Real Estate Sector? Mark Winiarski & Heather Winiarski December 5, 2018 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
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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 4
Presenters Located in our Kansas City office, Mark is a member of our Professional Standards Group (PSG). Mark's role includes instructing in our national training program, presenting as a subject matter expert at webinars and conferences, and preparing MHM publications on accounting and auditing issues. As a PSG member, Mark consults with clients and engagement teams across the country in many areas of accounting and auditing. Mark has served clients as an auditor, consultant and advisor in numerous MARK WINIARSKI, CPA MHM Shareholder industries including manufacturing, distribution, mining, retail sales, services and software. 816. 945. 5614 • mwiniarski@cbiz. com • @KCWini Questions? Email cbizmhmwebinars@cbiz. com 5
Presenters Heather serves as a Senior Manager in the Kansas City office of CBIZ & MHM. Her responsibilities include supervising medium to large audit engagements, and resolving critical audit and risk issues. Heather serves as a subject matter expert on lease accounting for MHM's Professional Standards Group. She specializes in the use of computer-assisted audit tools and techniques (CAATTs) to analyze large amounts of data and look for irregularities and leads MHM's IDEA Champions Group. HEATHER WINIARSKI, CPA 816. 945. 5168 • hwiniarski@cbiz. com • @Mc. Wini. CPA Senior Manager Questions? Email cbizmhmwebinars@cbiz. com 6
Agenda 01 Overview of the New Standards 02 Walkthrough of Examples 03 Preparing for Implementation 04 Questions? Email cbizmhmwebinars@cbiz. com 7
OVERVIEW OF THE NEW LEASING STANDARD ASC Topic 842, Leases Questions? Email cbizmhmwebinars@cbiz. com 8
An Overall Process Transition 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 9
Does the Contract Contain a Lease? Right to control the use Contracts within the scope Obtain substantially all of the economic benefits Direct the use of the identified asset Explicitly or implicitly stated Identified asset No substantive right of substitution Questions? Email cbizmhmwebinars@cbiz. com 10
What are the Components of a Contract? • Components transfer a good or service • Separate lease components if • 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 of use • Allocate consideration based on ASC Topic 606, Revenue from Contracts with Customers • Practical expedient is available Questions? Email cbizmhmwebinars@cbiz. com 11
What is the Lease Classification? Some Revised Definitions • Lease commencement • Date at which the underlying asset is available for use by a lessee • Lease payments • Initial direct costs • Incremental costs that would not have been incurred if the lease had not been executed • Rate implicit in the lease Present value of lease payments and expected residual value of underlying asset = Fair value of underlying asset at commencement and deferred initial direct costs Questions? Email cbizmhmwebinars@cbiz. com 12
What is the Lease Classification? The Five Criteria 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 13
What is the Lease Classification? Lease Types for Lessors How many lease criterion are met? 1 Sales-type lease 0 Does including all residual value guarantees meet the substantially all criterion and is collectability probable? Yes Direct financing lease Questions? Email cbizmhmwebinars@cbiz. com No Operating lease 14
What is the Accounting Treatment? Lessor Accounting Operating Lease Sales-type Lease α (No criterion met) • Still recognize the underlying asset • Lease income (straight-line) • Cash received for lease payments (At least 1 criterion met) B/S I/S C/F • Net investment in the lease • Selling profit/loss at commencement • Initial direct costs β • Interest income • Cash received for lease payments Direct financing Lease (Additional 2 criterion met) B/S I/S C/F • Net investment in the lease (includes deferred selling profit) • Selling loss at commencement • Interest income • Cash received for lease payments α If collectibility is not probable at commencement, record a deposit liability until collectibility becomes probable. β Initial direct costs are expensed at commencement if the fair value of the underlying asset is different than its carrying amount. Questions? Email cbizmhmwebinars@cbiz. com 15
What is the Accounting Treatment? Disclosures - General • Information about the nature of its leases and subleases • Information about significant assumptions and judgments • Related party transactions • Information about how the lessor manages its risk associated with the residual value of the leased assets Questions? Email cbizmhmwebinars@cbiz. com 16
What is the Accounting Treatment? Disclosures - Quantitative • Lease income, in a tabular format • For sales-type leases and direct financing leases • Profit or loss recognized at the commencement date • Interest income either in aggregate or separated by components of the net investment in the lease • For operating leases, lease income relating to lease payments • Lease income relating to variable lease payments not included in the measurement of the lease receivable • Sales-type and direct financing leases • The components of the net investments in leases • Significant changes in the balance of unguaranteed residual assets and any deferred selling profit • Maturity analysis of undiscounted lease receivables reconciled to the balance sheet • Operating leases • Maturity analysis of undiscounted lease payments to be received • Property, plant and equipment disclosures for leased assets separately from owned assets Questions? Email cbizmhmwebinars@cbiz. com 17
Reassessments & Modifications Overall • Reassess whether a contract contains a lease if terms and conditions change • Modification is a change that results in a change in the scope of or the consideration for a lease • Treat as new lease if additional right of use is priced commensurate with its standalone price • Otherwise, treat as a modification • Reassess lease classification and discount rate • Accounting treatment depends on lease type before and after change Questions? Email cbizmhmwebinars@cbiz. com 18
OVERVIEW OF THE NEW REVENUE RECOGNITION STANDARD ASC Topic 606, Revenue from Contracts with Customers Questions? Email cbizmhmwebinars@cbiz. com 19
General Application Criteria vs Steps Topic 605 • Revenue is recognized when realized/realizable and earned - “four criteria” to recognize revenue • Persuasive evidence of an arrangement • Delivery and performance • Fixed or determinable sales price • Collectability is reasonably assured Questions? Email cbizmhmwebinars@cbiz. com Topic 606 1 2 3 4 5 • Identify the contract(s) with a customer. • Identify the performance obligations in the contract. • Determine the transaction price. • Allocate the transaction price to the performance obligations in the contract. • Recognize revenue when (or as) the entity satisfied a performance obligation. 20
Disclosures • Disaggregation of revenue • Reconciliation of contract asset and liability balances • Remaining performance obligations • Capitalized cost to obtain or fulfill contracts • Significant judgments and changes in judgments • How management determines the minimum amount of revenue not subject to variable consideration constraints • Practical expedients elected Questions? Email cbizmhmwebinars@cbiz. com 21
AN EXAMPLE Lease of Office Space Questions? Email cbizmhmwebinars@cbiz. com 22
2018 -11 Leasing: Targeted Improvements • Lessor practical expedient • Combine a lease and nonlease (revenue) component if: • Timing and pattern of transfer are the same, and • Lease component would be an operating lease if accounted for separately • Apply the accounting guidance associated with the predominant component Questions? Email cbizmhmwebinars@cbiz. com 23
Lease Accounting Example • Lease of office space: • Four year term • Monthly lease payment of $2, 000 plus 1% of the tenant’s sales • Includes common area maintenance Components Lease of office space Maintenance service Questions? Email cbizmhmwebinars@cbiz. com Assumed Standalone Selling Price: $75, 000 $25, 000 24
Is the time and pattern of transfer the same? • Lease of office space: ratable over-time • Maintenance service (Step 5 of Topic 606): • Entity consumes the services as they are transferred • Over-time recognition • Likely a stand ready obligation - monthly recognition Yes, time and pattern of transfer are the same, account based on the predominant component Questions? Email cbizmhmwebinars@cbiz. com 25
Is it an Operating Lease? • Determine the lessor’s consideration: • Lease payments + • Fixed payments + • Variable payments specifically related to lessor’s efforts or the outcomes of nonlease goods or services Lessor’s consideration = $96, 000 $2, 000 x 48 months Questions? Email cbizmhmwebinars@cbiz. com 26
Is it an Operating Lease? 1. Is there a transfer of ownership? • Assumption: No Usual ly ass ess qualit ativel y 2. Is there an option to purchase that is reasonably certain to be exercised? • Assumption: No 3. Is the lease for the major part of the remaining economic life of the building? • Assumption: Remaining life of the building is 10 years 4. Is the present value of the lease (and residual value guarantees) substantially all the fair value of the asset? • Assumptions: Fair value of the office space is $215, 000 and the Lessor expects to derive $180, 000 from the office space after the term 5. Is the underlying asset specialized with no alternative use at the end of the lease? • Assumption: No Questions? Email cbizmhmwebinars@cbiz. com 27
Evaluating Criteria #4 • Allocate the lessor consideration to the lease and nonlease component Assumed Standalone Selling Price: % Allocation of monthly lease payment Lease of office space $75, 000 75% $1, 500* Maintenance service $25, 000 25% $500 Components $100, 000 Questions? Email cbizmhmwebinars@cbiz. com $2, 000 *$2, 000 x 0. 75 = $1, 500 per month 28
Evaluating Criteria #4 • Determine the rate implicit in the lease • • Lease payments: Remaining value: Fair value: Deferred initial costs: $1, 500 over 48 months s $180, 000 e l a e S s $215, 000 a a e t L $0 o N pe Ty • Excel RATE function determines an interest rate of 4. 7% • RATE(48, -1500, 215000, -180000, 1)*12 • Excel PV function determines a present value of $65, 780 • PV(. 047/12, 48, -1500, , 1) Questions? Email cbizmhmwebinars@cbiz. com 29
Is it an Operating Lease? • A direct financing lease is one where: • Present value of lease payments, lessee residual value guarantees, and third-party guarantees is substantially all the value; and • Probable the above will be collected Conclusion: Lease is an operating lease Questions? Email cbizmhmwebinars@cbiz. com 30
Practical Expedient Outcome • Assume tenant sales of $100, 000 in the first month • With the practical expedient recognize lease revenue of $3, 000 • $2, 000 + (1% * $100, 000) • Without the practical expedient recognize: • Lease revenue of $2, 250 • $1, 500 + (1% * $100, 000* 75%) • Maintenance revenue of $750 • $500 + (1% * $100, 000 * 75%) Questions? Email cbizmhmwebinars@cbiz. com 31
Proposed Changes • Exclude from variable payments all costs paid by a lessee directly to a third party • Costs paid by the lessor to a third party and reimbursed by a lessee are lessor costs included as variable payments • Will provide clarification on how and when variable payments may be allocated to the lease component only Questions? Email cbizmhmwebinars@cbiz. com 32
ANOTHER EXAMPLE Management Fees Questions? Email cbizmhmwebinars@cbiz. com 33
Management Services • Background: • Company provides services to rent, lease, operate, sell and/or manage a property on behalf of the owner for five years • Owner pays the company 4% of gross receipts plus direct salary costs on a monthly basis • Early termination is not permitted This is not a leasing transaction and would generally be in scope of Topic 606 Revenue from Contracts with Customers Questions? Email cbizmhmwebinars@cbiz. com 34
Applying the 5 -Step Model 1 • Likely have a contract after evaluating the five criteria for a contract and assess the termination provisions 2 • Likely conclude there is a single performance obligation that consists of a series of distinct services 3 • Likely conclude that estimation of variable consideration to determine transaction price is not necessary for bookkeeping or disclosure purposes 4 • Allocate the variable consideration to each distinct service in the series to which it relates 5 • Recognize revenue monthly based on 4% of gross receipts plus direct salary cost incurred Questions? Email cbizmhmwebinars@cbiz. com 35
Potential Pitfalls 1 • The services are not part of “ongoing and central operations, ” therefore the arrangement is not with a customer 2 • Additional goods and services that are distinct, such as a license of intellectual property 3 • Variable consideration must be estimated to accomplish the allocation objective (e. g. escalating commission percent or multiple performance obligations) 4 5 • Allocate the variable consideration to multiple performance obligations • Agreement includes provision of goods or services that should be recognized at a point in time Questions? Email cbizmhmwebinars@cbiz. com 36
PREPARING FOR IMPLEMENTATION Questions? Email cbizmhmwebinars@cbiz. com 37
Effective Dates Public Business Entities* for fiscal years (including interim periods within) All others for fiscal years Revenue Recognition Lease Accounting Beginning after December 15, 2017 Beginning after December 15, 2018 Beginning after December 15, 2019 *includes certain not-for-profit and employee benefit plans Questions? Email cbizmhmwebinars@cbiz. com 38
Transition Methods Revenue Recognition Lease Accounting Full retrospective - Adjust equity at the beginning of the earliest comparative period presented Modified retrospective - Adjust equity at beginning of the reporting period in which the entity first adopts the new standard Questions? Email cbizmhmwebinars@cbiz. com 39
Leasing 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 40
Transition Disclosures • Requires disclosures under Topic 250, Accounting Changes and Error Corrections • The nature of and reason for the change in accounting • The method of applying the change in accounting, including a description of the prior-period information that has been retrospectively adjusted and the cumulative effect of the change on retained earnings • If an entity should disclose any of the practical expedients for transition that it uses Questions? Email cbizmhmwebinars@cbiz. com 41
Key Changes for Operating Lessors • Narrowed definition of initial direct costs • Executory costs are no longer excluded from lease payments 2018 2020 2019 • Lessor accounting for a lease • modification depends on the classification of the original and the modified lease • Apply the transaction price allocation guidance from ASC Topic 606, including specific guidance on bundled discounts and variable consideration Real estate-specific guidance has been removed Questions? Email cbizmhmwebinars@cbiz. com 42
Proposed Timeline & Considerations 2018 2019 Train employees Create policies and Identify your controls revenue streams and current GAAP Determine leasing transition Educate users adjustments Determine revenue Gather disclosure transition information adjustments Adopt the new revenue recognition standard Questions? Email cbizmhmwebinars@cbiz. com 2020 Adopt the new leasing standard 43
? QUESTIONS Questions? Email cbizmhmwebinars@cbiz. com 44
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If You Enjoyed This Webinar… Upcoming Courses: • 12/11: How Private Companies can be Prepared for Tax Reform Accounting • 12/14: Revenue Recognition Check-In for the Construction Industry • 12/17: Revenue Recognition Check-In for the Technology Industry • 12/19: Key Issues Facing Public Companies in 2019 – SEC and PCAOB Updates Recent Publications: • Six Questions Tech Companies Should be Asking About Revenue Recognition • FASB Releases Consolidation Relief • Four Things Private Companies can do in 2018 to Make Adopting the Leasing Standard Easier • How to Make Sure You're in Compliance with the GDPR Questions? Email cbizmhmwebinars@cbiz. com 46
THANK YOU CBIZ & Mayer Hoffman Mc. Cann P. C. cbizmhmwebinars@cbiz. com Questions? Email cbizmhmwebinars@cbiz. com 47
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