Many large companies are considering early implementation of ASU 842 – the new lease accounting rules. As examples, both Target and Microsoft have disclosed in their 10Ks that they are shooting for implementation this year instead of 2019 if they can get their systems solutions ready. The reason is they want to combine the transition to the new Revenue Recognition accounting standard with the transition to the new lease accounting rules as the projects are large. This came as a bit of a surprise to me for two reasons – the transition to the lease project is a huge undertaking to do quickly and the new lease rules contain some negatives that I thought that lessees would want to postpone for as long as possible.
What does this news mean to lessors? First they have to accelerate their work in reviewing existing products for possible changes, modifying their marketing materials to reflect the new rules, educating their sales force, engaging with their customers re the issues that impact them both and preparing for questions customers are likely to ask. As examples:
The new rules re: sale leasebacks with fixed purchase options (including Build-To-Suit real estate leases) mean careful structuring and working with customers to insure the transactions qualify as sales.
Customers will still want leases to be classified as operating leases and terms like interim rents and restocking fees will not be overlooked in accounting for leases – those are lease payments to be included in the classification tests and in the capitalization calculation.
Customers will want the lowest PV to reduce the impact on their ROA caused by the new capitalized lease asset and there are opportunities in the new rules to minimize lease payments capitalized.
Where the lease is a bundled billed lease with services, the lessee will ask for a breakdown of the lease and services portion of existing as well as new leases and if the lessor is unwilling to disclose it they may need help in estimating the breakdown with supporting market evidence.
Where the lease includes a lessee residual guarantee, the lessee may ask for help in evaluating the likelihood of a payment under the guarantee, meaning they need to know the estimated fair market value on the date the guarantee comes into effect. If a payment under a residual guarantee is probable it is a lease payment to be capitalized, so expected values vs. residual guarantee strike prices will have to be monitored by lessees for possible adjustment whenever financial results are reported.
About the Contributing Author
Bill Bosco is the Principal of Leasing 101, a lease consulting company. Bill has over 40 years experience in the equipment finance and leasing industry. He has been on the ELFA financial accounting committee since 1988, served as chairman for 10 years, and currently is the association’s retained lease accounting advisor. Bill also served on FASB’s working committee for the Leases project ASU 842. At the same time, he has worked closely with Alan Bushell and the ProLease development team as a consultant assisting with research, testing and programming of the new FASB-IASB lease accounting guidance in ProLease.