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Full disclosure: Leases · PwC's accounting podcast

• 0:00
  SPEAKER_01: Thought Leadership from PWC.
• 0:06
  SPEAKER_02: Welcome to PWC's Accounting Podcast.
• 0:09
  SPEAKER_02: I'm Heather Horn.
• 0:10
  SPEAKER_02: Thanks for tuning in to the next episode in our full disclosure series, a show all about presentation and disclosure from the top of the financial statements down to the last footnote.
• 0:21
  SPEAKER_02: While it may sound like accounting 101, I guarantee you'll learn something new each episode.
• 0:28
  SPEAKER_02: Today's focus presentation and disclosure requirements for lessees on their lease disclosures.
• 0:34
  SPEAKER_00: Just gaining a good understanding, even finding all the documentation and making sure that you're ready to adopt the standard when it goes live is probably the most important thing to do.
• 0:44
  SPEAKER_00: Just get the information.
• 0:45
  SPEAKER_03: Start early.
• 0:46
  SPEAKER_03: Don't underestimate the effort that it's gonna take.
• 0:49
  SPEAKER_02: Those are my guests, Mark Jerusalem and Suzanne Stefani, both directors in PWC's national office.
• 0:57
  SPEAKER_02: There can be a lot of stumbling blocks when it comes to getting your leasing disclosures right.
• 1:01
  SPEAKER_02: So Mark and Suzanne are going to break down what you need to know by sharing helpful insights and key reminders.
• 1:12
  SPEAKER_02: So, Mark, Suzanne, thanks so much for joining me today as we are starting to move into the final weeks of our presentation and disclosure series, hitting a very important topic now, though, which should be leases and specifically focusing on those 842 disclosure requirements.
• 1:30
  SPEAKER_02: So start in a logical place and perhaps start off with the balance sheet.
• 1:34
  SPEAKER_02: Mark, how should we be thinking about the right of use asset?
• 1:39
  SPEAKER_00: Yeah, hi Heather.
• 1:40
  SPEAKER_00: So when we think of the right of use asset, you know, we think of this typically as a non-current asset.
• 1:45
  SPEAKER_00: It is similar to other PPE type assets.
• 1:49
  SPEAKER_00: I think the biggest thing to remember on the balance sheet is the unique requirement within Topic 842 that when you present your right of use assets, if you have operating lease right-of-use assets and finance lease right-of-use assets, they have to be on different financial statement line items.
• 2:06
  SPEAKER_00: So they can't be in the same place.
• 2:08
  SPEAKER_00: So just something to bear in mind.
• 2:10
  SPEAKER_00: For example, if you have your operating lease right-of-use assets with PPE, then your finance lease assets, which are even more PPE like, actually have to be in a different line item.
• 2:20
  SPEAKER_00: And of course, you know, we'll talk about that later, but you have to disclose which line item they're in.
• 2:24
  SPEAKER_00: And again, you know, in terms of current versus non-current, think of a right-of-use asset from that perspective, similar to a fixed asset.
• 2:31
  SPEAKER_00: So that you generally would never have a current portion.
• 2:34
  SPEAKER_00: It would always be just a non-current asset.
• 2:36
  SPEAKER_02: All right, that's helpful.
• 2:37
  SPEAKER_02: And then Suzanne, of course, thinking about the liability, I turn to you since you and I often speak about that side of the balance sheet.
• 2:45
  SPEAKER_02: Uh so what can you share with us on the lease liability?
• 2:48
  SPEAKER_03: Yeah, let's start at first on where on the balance sheet the lease liability should be presented.
• 2:54
  SPEAKER_03: So the guidance requires that the lease liability for a finance lease and the lease liability for an operating lease have to be presented separately on the balance sheet.
• 3:04
  SPEAKER_03: So similar to like Mark said for the right-of-use assets.
• 3:07
  SPEAKER_03: Now, some companies do put lease liabilities in other liabilities line, which is fine, but you have to disclose which line item the lease liability is included on in the balance sheet.
• 3:19
  SPEAKER_03: And again, it can't be in the same line.
• 3:21
  SPEAKER_03: So you can't put finance lease liabilities and operating lease liabilities in the same other liabilities line.
• 3:27
  SPEAKER_03: I know I said liabilities many times there, but hopefully that was clear.
• 3:31
  SPEAKER_02: Well, and if I'm doing my math, you could wind up with four new lines from all this, depending on how you classify these things.
• 3:38
  SPEAKER_02: So anyway, all right.
• 3:39
  SPEAKER_02: So how about current versus non-current, Suzanne?
• 3:42
  SPEAKER_03: Yeah, so that classification of the liability as current versus non-current, it actually follows the same rules as any other debt instrument, like we've talked about many times.
• 3:52
  SPEAKER_03: But if you think about the lease liability, it's really, it's really working like an amortizing loan.
• 3:59
  SPEAKER_03: And for amortizing loans, when you think about classification as current or non-current, there's a there's a few policy choices.
• 4:06
  SPEAKER_03: So one option would be you take the contractual lease payments that are due in the next 12 months from the balance sheet date or operating cycle if you're using that.
• 4:16
  SPEAKER_03: Um you take those contractual lease payments and you present value them to the balance sheet date using the liability's effective interest rate.
• 4:24
  SPEAKER_03: That amount you put in current, and then obviously the rest is in non-current.
• 4:28
  SPEAKER_03: That's one option.
• 4:30
  SPEAKER_03: Another option that some companies do, and this is just simpler, but they take the undiscounted contractual lease payments that are due in the next 12 months and make them current.
• 4:42
  SPEAKER_03: That's another option.
• 4:43
  SPEAKER_03: So the third option would be use the lease amortization schedule.
• 4:47
  SPEAKER_03: So remember, when you set up a lease liability, you have an amortization schedule, and each cash payment, a portion of it is attributed to a principal payment that reduces the liability, and a portion of it is attributed to interest.
• 5:01
  SPEAKER_03: So some companies take that schedule and use the total principal payments that are due in the 12 months following the balance sheet and make that current.
• 5:09
  SPEAKER_03: So the point here though is this is really nothing new.
• 5:14
  SPEAKER_03: It's it's policy choices for amortizing debt, and and companies may already have a policy and they should stick with that consistently for all loans.
• 5:23
  SPEAKER_02: All right.
• 5:23
  SPEAKER_02: So, Suzanne, just to clarify that point, then you couldn't have a different policy between other loans and then these leases.
• 5:32
  SPEAKER_02: Right.
• 5:32
  SPEAKER_02: If they're they're all amortizing loans, they should be consistent.
• 5:35
  SPEAKER_02: Yeah.
• 5:36
  SPEAKER_02: Okay, that's helpful.
• 5:37
  SPEAKER_02: So then, Mark, let me go back to you with my next question.
• 5:40
  SPEAKER_02: And this would be on lease incentives.
• 5:42
  SPEAKER_02: So I know frequently in real estate leases, the Lessor will give tenants improvement allowances to be used.
• 5:50
  SPEAKER_02: And I think the three of us have talked about some of these um examples on past podcasts and webcasts.
• 5:55
  SPEAKER_02: So how maybe give a little bit more background on what we're talking about with those incentives and then how should those be presented on the balance sheet?
• 6:04
  SPEAKER_00: You're right, Heather.
• 6:05
  SPEAKER_00: We have talked about lease incentives in the past.
• 6:07
  SPEAKER_00: And you're also right that whenever lessors give lease incentives, it's actually very common for them to collect the lease incentive after the lease has already commenced.
• 6:17
  SPEAKER_00: Um, frequently it's to reimburse them up to a you know a certain limited amount for expenditures that they've incurred, for example, to outfit the new space or even to move into the new space.
• 6:28
  SPEAKER_00: So in many of those cases, the new space is already available and the lease has commenced.
• 6:32
  SPEAKER_00: We've gotten a lot of questions about whether that receivable from the lessor should be presented on the balance sheet as an asset or as a reduction to a liability.
• 6:43
  SPEAKER_00: And we note that the you know, the lease liability on the balance sheet is the discounted amount of your future lease payments, lease payments being the defined term within the standard, and lease incentives is actually part of that definition of lease payments.
• 6:58
  SPEAKER_00: So we think the best presentation is to include the lease receivable, the incentive receivable, excuse me, as a negative cash flow within your lease amortization schedule and include it in the liability.
• 7:12
  SPEAKER_00: Okay?
• 7:12
  SPEAKER_00: Now, Suzanne was talking a moment ago about you know current versus non-current.
• 7:17
  SPEAKER_00: This sometimes you've gotten follow-on questions.
• 7:20
  SPEAKER_00: This is not common, but sometimes those lease incentives are so significant they may even exceed the amount of payments you have to make in the next 12 months.
• 7:29
  SPEAKER_00: So your net position in the next 12 months is actually a cash inflow rather than a payment outflow.
• 7:35
  SPEAKER_00: So in those cases, questions have arose as to, well, how do you figure out current versus non-current?
• 7:40
  SPEAKER_00: We think that the um if your net cash position in the next 12 months is a cash inflow from your lease liability, we think that your current lease liability would be zero and the entire lease liability would be non-current.
• 7:55
  SPEAKER_02: So, Mark, to clarify, you wouldn't actually set up a receivable in that case.
• 7:59
  SPEAKER_02: You would just put the remaining amount of the incentive as a deduction to the long-term portion.
• 8:05
  SPEAKER_00: That's right.
• 8:05
  SPEAKER_00: It would be part of your, you would think of it this way, you do a loan amortization schedule that happens to have one line item in that loan amortization schedule.
• 8:14
  SPEAKER_00: That's a cash inflow rather than a cash outflow, and figure out the discounted value using those cash flows.
• 8:20
  SPEAKER_02: All right, got it.
• 8:21
  SPEAKER_02: That's helpful.
• 8:21
  SPEAKER_02: Thank you.
• 8:22
  SPEAKER_02: So then let's move on to the income statement.
• 8:24
  SPEAKER_02: Uh, how would we think about expenses associated with leases?
• 8:29
  SPEAKER_02: And Mark, I'll stick to you with you for that question.
• 8:32
  SPEAKER_00: Sure.
• 8:32
  SPEAKER_00: So we've been saying all along that, you know, on the balance sheet, um, the operating leases and the finance leases have to be shown separately.
• 8:40
  SPEAKER_00: Luckily, we don't have to say that for the income statement because their very nature is different, right?
• 8:45
  SPEAKER_00: I'm gonna actually start with finance leases for the moment.
• 8:48
  SPEAKER_00: So on the finance lease, right, similar to the old capital leases, that consists of like an interest portion and an amortization portion.
• 8:56
  SPEAKER_00: And you would record those expenses typically in the two line items, one with your other interest expenses and with your up, and the other with your other depreciation and amortization expenses.
• 9:07
  SPEAKER_00: With an operating lease, however, even though it's grossed up on the balance sheet, a separate asset and liability, we don't split out the expense between any portions.
• 9:17
  SPEAKER_00: Rather, we show the entire operating lease expense as a single lease expense line, if you will.
• 9:24
  SPEAKER_00: And that would also include any variable expenses associated with the operating lease.
• 9:29
  SPEAKER_00: So that would just be a single line item within continuing operations, right, uh, of your single lease expense.
• 9:36
  SPEAKER_00: Now, I mentioned um variable expense, if I could just go back to that for a second.
• 9:40
  SPEAKER_00: So I just said that on an operating lease, that should be just part of your single lease expense.
• 9:45
  SPEAKER_00: We've gotten the question, you know, what do you do with that on a finance lease?
• 9:49
  SPEAKER_00: Is it the interest portion?
• 9:51
  SPEAKER_00: Is it the amortization portion, or is it something else?
• 9:55
  SPEAKER_00: Right?
• 9:56
  SPEAKER_00: So I think in most cases, in most cases where you have a finance lease liability, that you're gonna have a lot of lease payments, fixed lease payments, and the variable lease is kind of like a kicker, right?
• 10:06
  SPEAKER_00: So we would typically think of that as additional interest expense.
• 10:10
  SPEAKER_00: And that's where it ought to go.
• 10:12
  SPEAKER_00: You know, we have had some situations where you have a finance lease, but there's no lease liability or a very little lease liability because almost all your payments are variable rent expense, right?
• 10:23
  SPEAKER_00: And in those cases, it would seem odd to have this giant interest expense when there's no underlying financing on the balance sheet.
• 10:30
  SPEAKER_00: So in those cases, we don't think you should have it there and maybe just call it lease expense.
• 10:34
  SPEAKER_00: So it may depend on your facts and circumstances.
• 10:37
  SPEAKER_00: But I think for most people where you have a significant lease liability, but you also have some additional variable lease expense, we would consider that just incremental interest expense for the PL.
• 10:48
  SPEAKER_02: All right, very helpful.
• 10:49
  SPEAKER_02: So then let's move on to the cash flow statement.
• 10:51
  SPEAKER_02: And Suzanne, and I feel like this is a topic you and I frequently speak about, but specific to lease-related items, how should payments related to lease expense be presented in the cash flow statement?
• 11:03
  SPEAKER_02: And I know there's a little nuance here, so curious to hear what you're going to tell us.
• 11:07
  SPEAKER_03: Yeah, sure.
• 11:08
  SPEAKER_03: So I guess I'll start with finance lease because that's a bit simpler.
• 11:11
  SPEAKER_03: So the finance lease in the statement of cash flows, it's just going to be treated like any other debt instrument, right?
• 11:17
  SPEAKER_03: So there's it's that's pretty straightforward.
• 11:19
  SPEAKER_03: Where we get most of the questions is around the operating lease payments and the use of the indirect method when you're doing the statement of cash flows, which I think nearly everyone does the indirect method.
• 11:30
  SPEAKER_03: So we'll focus on that.
• 11:32
  SPEAKER_03: So all payments, all lease payments for operating leases do go through the operating section of the cash flow statement for sure.
• 11:40
  SPEAKER_03: But questions come up on which line when you're doing, you know, the reconciliation of net income to total operating cash flows.
• 11:47
  SPEAKER_03: Because the reason that comes up now with the leases guidance here is because there's two accounts now for leases, right?
• 11:54
  SPEAKER_03: Like we just spoke about.
• 11:55
  SPEAKER_03: There's a lease liability and there's a right of use asset.
• 11:58
  SPEAKER_03: And they're both impacted by the single lease expense that goes through net income and other changes.
• 12:04
  SPEAKER_03: So when you're doing the reconciliation to net income to get to operating cash flows, we think the best approach to follow would have you'd have one line item for the portion of the single lease expense that reduces the right of use asset.
• 12:18
  SPEAKER_03: You'd have one line item for the change in the lease liability related to the lease payment, and then any other change to those accounts for like remeasurement events, modifications, those are all non-cash.
• 12:29
  SPEAKER_03: So they would just be disclosed as non-cash activity.
• 12:32
  SPEAKER_03: They wouldn't show up in this reconciliation to net income.
• 12:36
  SPEAKER_03: Um, so we think this separate presentation on the cash flow statement, it makes sense because it's consistent with that separate presentation you see on the balance sheet.
• 12:45
  SPEAKER_03: But there is, I have to say, there is some in practice some diversity where some companies continue to treat that single lease expense change as one line item, like they did before they started applying uh the new leases guidance.
• 12:58
  SPEAKER_03: So that that's out there as well.
• 13:00
  SPEAKER_02: All right.
• 13:00
  SPEAKER_02: So let me ask you a couple specifics then.
• 13:03
  SPEAKER_02: So we were just talking about ongoing lease payments, but I know we often also see prepaid rent.
• 13:09
  SPEAKER_02: So how would I think about that?
• 13:11
  SPEAKER_03: Yeah, so when you have prepaid rent, so that's before you have the lease on your balance sheet, right?
• 13:17
  SPEAKER_03: You make a lease payment.
• 13:18
  SPEAKER_03: And so where you put it on the cash flow statement, it depends on the ultimate, ultimately how the lease is gonna be classified at at least commencement.
• 13:27
  SPEAKER_03: So if it's very clear evidence, you know that you're gonna have a finance lease at least commencement, then put the prepaid rent in investing, right?
• 13:38
  SPEAKER_03: But otherwise, it it would go to operating.
• 13:41
  SPEAKER_03: If you're just not sure or you know it's an operating lease, it should go to operating.
• 13:45
  SPEAKER_02: All right.
• 13:45
  SPEAKER_02: And then similar to the question I asked Mark earlier about tenant improvements, uh, how do we think about those types of payments in the cash flow statement?
• 13:54
  SPEAKER_03: Yeah, so like Mark said, it's come to get reimbursed for leasehold improvements or payments for making leasehold improvements.
• 14:01
  SPEAKER_03: So the first thing here you have to do is figure out what you're paying for as a lessee.
• 14:08
  SPEAKER_03: Are you paying for your own asset, a lessee asset, or are you paying for something for the lessor?
• 14:13
  SPEAKER_03: So you're paying for a lessor asset.
• 14:15
  SPEAKER_03: Um we have lots of guidance on that in the leasing guide.
• 14:19
  SPEAKER_03: But basically, if you're making a payment for a lessee asset, you're making a payment for your own fixed asset, right?
• 14:25
  SPEAKER_03: So that's investing.
• 14:27
  SPEAKER_03: But sometimes the lessor will reimburse you for that asset, and that would be treated like a lease incentive.
• 14:34
  SPEAKER_03: So if you get a lease incentive, it's treated like any other lease payment.
• 14:38
  SPEAKER_03: So if the lessor paid you for your own asset, when you get that cash in for an operating lease, it would be an operating inflow because you got in cash in.
• 14:48
  SPEAKER_03: Now, if you're paying as a lessee, you're paying for a lessor asset, then that would essentially be, you know, we think you'd be paying that before lease commencement.
• 14:59
  SPEAKER_03: That would essentially be treated like prepaid rent.
• 15:01
  SPEAKER_03: And you'd follow the model I discussed earlier.
• 15:04
  SPEAKER_03: So if it's for an operating lease, it would be an operating.
• 15:06
  SPEAKER_03: If you knew it was going to be for a finance lease, it would go into investing.
• 15:10
  SPEAKER_02: All right.
• 15:11
  SPEAKER_02: And I guess one thing that came to mind that maybe we should have prefaced this whole discussion.
• 15:15
  SPEAKER_02: Um, we are looking at all of this through the lens of the lessie.
• 15:19
  SPEAKER_02: Right.
• 15:20
  SPEAKER_02: Is that just yes, just because I think there's many more lessies out there.
• 15:25
  SPEAKER_02: Yep, totally makes sense.
• 15:26
  SPEAKER_02: Just wanted to make sure for our listeners they knew that all of this is through a lessie lens.
• 15:31
  SPEAKER_02: All right.
• 15:31
  SPEAKER_02: So then with that, let's move on to disclosures.
• 15:34
  SPEAKER_02: And I know that there are many new disclosures compared to what we had under 840.
• 15:41
  SPEAKER_02: And um, these expands disclosures are really to help the users better understand the amounts, timing, uncertainty of cash flows related to companies' leases.
• 15:52
  SPEAKER_02: But again, it's a lot and it's new.
• 15:55
  SPEAKER_02: So, Mark, just focusing in on disclosures, where would you start?
• 15:59
  SPEAKER_00: Yeah, Heather, the one caveat I would give to any of the disclosure requirements is, you know, one thing I found interesting so far, we have not seen a lot of SEC comments yet on 842.
• 16:10
  SPEAKER_00: It's a brand new standard.
• 16:12
  SPEAKER_00: However, yeah, I don't want to call it a theme, but but if there is some commonality to some of those SEC comment letters, they've they've talked about wanting to be more specific on the disclosures and not have boilerplate disclosures.
• 16:26
  SPEAKER_00: So we're gonna have qualitative disclosures and quantitative disclosures.
• 16:29
  SPEAKER_00: And especially on those qualitative ones, you know, it would seem from the SEC comments that we should really try to be more specific to our unique fact patterns and not be boilerplate kind of regurgitating sentences from the standard, right?
• 16:42
  SPEAKER_00: So let's talk first about those qualitative disclosures.
• 16:45
  SPEAKER_00: So we have to disclose the nature of our leases or subleases, right?
• 16:49
  SPEAKER_00: So that would include like a general description of the leases, whether those leases have requirements to make variable payments, and under what terms and conditions you would make those payments, right?
• 16:59
  SPEAKER_00: What determines the variability?
• 17:01
  SPEAKER_00: So, for example, if you had retail stores that included fixed rents and percentage sales, you know, variable payments, disclose that fact, right?
• 17:09
  SPEAKER_00: They want to disclose, or they, the standard says to disclose whether we have um extension options or termination options, and generally whether those are included in the lease liability or not, right?
• 17:22
  SPEAKER_00: We have to disclose the existence of residual value guarantees and the existence of any covenants or restrictions.
• 17:30
  SPEAKER_00: And this is one of those silent type of disclosures that a lot of companies are unaware of.
• 17:36
  SPEAKER_00: If you have large leases or master leases, if you look deep down into the terms and conditions of those leases, you will very often find that they do have some actually pretty restrictive covenants, or they might be cross-collateralized to other finance arrangements that also have restrictive covenants.
• 17:54
  SPEAKER_00: So those conditions should be disclosed.
• 17:56
  SPEAKER_00: And then finally, on the qualitative side, um, if you have significant leases that have not yet commenced, we should talk about those because that might indicate different cash flows from the ones that the reader's looking at in the balance sheet.
• 18:10
  SPEAKER_00: And then significant judgments and assumptions.
• 18:14
  SPEAKER_00: So where are those?
• 18:15
  SPEAKER_00: So, you know, typically if we have like service arrangements that are accounted for as a lease or perhaps that don't include a lease, we should, if we had to make a significant evaluation as to whether it is or isn't a lease, we should probably disclose the judgments around that evaluation, um, as well as how we allocate it between lease components and non-lease components, if that's an issue.
• 18:37
  SPEAKER_00: Um, and also how we determine discount rates.
• 18:40
  SPEAKER_00: So on the discount rates, that's another area where we've seen a little bit of SEC activity in asking more about discount rates, um, specifically talking about some of the assumptions that you used in deriving those rates, um, as well as like one example is if the company used a portfolio approach to determining its discount rates on a lease, then you know, the tell us more about the portfolio that was included in coming up with that rate.
• 19:08
  SPEAKER_00: Um finally, again on the qualitative, I keep on saying finally, but there's always more qualitative.
• 19:14
  SPEAKER_02: That's a long list.
• 19:16
  SPEAKER_00: Finally, on the qualitative, um, the leasing standard, as anybody who's implemented it knows, has a number of elective policies or practical expedients like short-term leases or the expedient to combine lease and non-lease components, as a couple of examples.
• 19:33
  SPEAKER_00: So, whichever ones you've adopted, you should disclose that as well, right?
• 19:38
  SPEAKER_00: So that's the qualitative.
• 19:40
  SPEAKER_00: Catch my breath here a second.
• 19:42
  SPEAKER_02: Now we go into the I'll I'll ask the next question then.
• 19:45
  SPEAKER_02: So this is an easy one.
• 19:47
  SPEAKER_02: What about quantitative?
• 19:49
  SPEAKER_00: All right, so quantitative, now we get back to the remember finance leases and operating leases shall be disclosed separately, right?
• 19:57
  SPEAKER_00: So we want to talk about our finance lease cost, our operating lease cost.
• 20:03
  SPEAKER_00: If we have leases that were using the short-term lease expedient, right, then what's the cost for those?
• 20:08
  SPEAKER_00: What's the cost for our variable leases, right?
• 20:11
  SPEAKER_00: Or variable lease payments, excuse me.
• 20:13
  SPEAKER_00: Um, sublease income, right?
• 20:15
  SPEAKER_00: If we have subleases, we have to disclose the gross cash flows on those subleases.
• 20:20
  SPEAKER_00: And sale lease back transactions, we that we could disclose net, the net gains or losses on a sublease, on a sale lease back, excuse me.
• 20:29
  SPEAKER_02: All right, that's quite a long laundry list.
• 20:31
  SPEAKER_02: So let me ask you a bit of a trick question here.
• 20:35
  SPEAKER_02: So, should the lease cost that's disclosed always match up with the amounts that we're seeing on the PL?
• 20:41
  SPEAKER_00: Right.
• 20:41
  SPEAKER_00: That's that is the reason that we say lease cost, or I should say the reason the standard says lease cost, because the standard setters recognize that sometimes your cash paid out for leases is included in a capital, you know, in the capitalized cost, for example, the buildup of inventory.
• 20:57
  SPEAKER_00: So it's not just the amounts that flow through the PL, but the total lease cost is what they want to disclose.
• 21:03
  SPEAKER_02: All right.
• 21:03
  SPEAKER_02: So just to clarify that one then, Mark, I just want to take an example.
• 21:07
  SPEAKER_02: So if you have a piece of equipment that's being leased that you're using maybe for construction or to your point for creation of inventory, then those costs would be being put on the balance sheet.
• 21:19
  SPEAKER_02: But what we're disclosing here is the combination of both what hit the income statement and the balance sheet.
• 21:24
  SPEAKER_00: That's right.
• 21:25
  SPEAKER_00: The to the total lease costs, whether it's capitalized or expensed.
• 21:28
  SPEAKER_00: Okay.
• 21:28
  SPEAKER_00: Combined.
• 21:29
  SPEAKER_00: Excellent.
• 21:30
  SPEAKER_00: Okay.
• 21:30
  SPEAKER_02: All right.
• 21:31
  SPEAKER_02: All right.
• 21:32
  SPEAKER_02: So then any other specific disclosures companies should be thinking about?
• 21:36
  SPEAKER_00: Um, yes.
• 21:37
  SPEAKER_00: So a couple of other things that we ought to mention is as Suzanne was talking about in the cash flow section, uh, we have our supplemental information.
• 21:46
  SPEAKER_00: You know, so we we have to disclose the cash paid out for the cash cash paid for leases included in lease liabilities.
• 21:53
  SPEAKER_00: So again, I think that would be separate between operating lease liabilities and finance lease liabilities.
• 21:58
  SPEAKER_00: Um, the non cash.
• 22:00
  SPEAKER_00: Information if I acquired a right of use asset, you know, by incurring a lease liability, you'd have to disclose that.
• 22:06
  SPEAKER_00: And then some new disclosures: the weighted average lease term, as well as the weighted average discount rates for leases, again, separately for operating leases and finance leases.
• 22:18
  SPEAKER_00: And then finally, the one thing that's not that much different from the olden days, uh, we have to include a maturity analysis of all of our lease liabilities again separately for the two types of leases, right?
• 22:29
  SPEAKER_00: And that would include the undiscounted cash flows related to your leases, you know, for each year for the next five years, and a total for the aggregate thereafter, and a reconciliation of those undiscounted cash flows to the lease liabilities on your balance sheet.
• 22:45
  SPEAKER_00: That part, of course, is new for operating leases because they weren't previously on balance sheet.
• 22:50
  SPEAKER_00: So lots and lots of disclosures, both qualitative and quantitative.
• 22:54
  SPEAKER_02: Definitely.
• 22:54
  SPEAKER_02: So then another question I always ask when it comes to these disclosures would be: are these all annual only, or do we expect to see these in the interim statements as well?
• 23:05
  SPEAKER_00: So the good news here, I guess, is that the standard itself does not have any specific quarterly reporting requirements.
• 23:13
  SPEAKER_00: So if you're just following topic 842, there's no disclosures required on a quarterly basis.
• 23:19
  SPEAKER_00: However, topic 270 really covers interim disclosures and interim statements.
• 23:25
  SPEAKER_00: And those, um, that standard would require you to disclose any significant changes from your most recent year end.
• 23:33
  SPEAKER_00: So think of significant changes in your financial position or new accounting estimates or principles.
• 23:40
  SPEAKER_00: Anything that makes your quarter less comparable to your most recent completed year end should probably be disclosed.
• 23:46
  SPEAKER_00: And then finally, one caveat: if leasing is a significant part of your business, which it certainly could be for some people in the audience, then a company should probably have lease disclosures similar to your end if it's very significant to your operations.
• 24:01
  SPEAKER_02: All right.
• 24:02
  SPEAKER_02: That's helpful.
• 24:02
  SPEAKER_02: Thank you.
• 24:03
  SPEAKER_02: So then let me move on to something where I know we've spent a lot of time over the past couple of years talking about everything going on in the world of real estate and how, in turn, some of those economic disruptions have really become lease issues for some because companies, you know, often are leasing real estate.
• 24:23
  SPEAKER_02: Uh so Suzanne just wanted to jump into a few specific questions related to that, starting with impairment.
• 24:30
  SPEAKER_03: Yeah, sure.
• 24:31
  SPEAKER_03: So if there's an impairment, the right of use asset is going to be written down with an impairment charge, right?
• 24:37
  SPEAKER_03: And the impairment charge would be treated like any other impairment charge in the income statement.
• 24:42
  SPEAKER_03: So now, after you take your impairment, you have the right of use asset is a smaller amount now because it's been written down.
• 24:49
  SPEAKER_03: So the expense going forward is going to change.
• 24:53
  SPEAKER_03: Now, for a finance lease, it's just like any other impaired asset that's that's mortgaged, right?
• 24:58
  SPEAKER_03: The amber amortization of the right of use asset is going to be adjusted going forward, but there won't be any change to the liability because the liability is still there.
• 25:07
  SPEAKER_03: You still owe the money to the lessor.
• 25:10
  SPEAKER_03: So there's really no change in how you're recognizing on the PL for an impaired finance lease.
• 25:14
  SPEAKER_03: It's just um, you know, it'll be a different amount of amortization for the right of use asset.
• 25:20
  SPEAKER_03: Now, when you get to an operating lease, if you think about it, the right of use asset's going to decrease.
• 25:26
  SPEAKER_03: But remember, when you set up your single lease expense back at um when the lease first started, it's all kind of like a plugged model in a way, right?
• 25:34
  SPEAKER_03: Like the interest impacts the amount of amortization on the right of use asset, but it's all treated as one single lease expense.
• 25:42
  SPEAKER_03: So now that the right of use asset is written down, there's got to be an adjustment to the way you're recognizing expense because it won't work out at the end.
• 25:51
  SPEAKER_03: You'll end up with a balance in either the right of use asset or lease liability.
• 25:55
  SPEAKER_03: So the leases guidance basically takes you off this straight line basis that you've been doing for an operating lease and it follows a finance model.
• 26:04
  SPEAKER_03: You'll, you'll be, you'll be in your kind of books of record, you'll be tracking an interest expense and an amortization expense.
• 26:12
  SPEAKER_03: But it's all the important thing here is it's all still shown, even though you're doing that behind the scenes, it's all still shown as one single lease expense in the PL.
• 26:21
  SPEAKER_03: You don't start actually showing interest and amortization in the PL.
• 26:25
  SPEAKER_03: So we just want to point that out just in case um, you know, someone's dealing with that.
• 26:30
  SPEAKER_02: All right.
• 26:30
  SPEAKER_02: And then what about termination payments or payments made for modifications?
• 26:35
  SPEAKER_03: Yeah, so we're seeing a lot of modifications and sometimes terminations now with changes in the in the way real estate is being used.
• 26:44
  SPEAKER_03: If you have a termination payment or modificate modification payment to the lessor, it's all treated just like any other lease payment.
• 26:53
  SPEAKER_03: So you're not breaking it out as a separate line item.
• 26:55
  SPEAKER_03: Um you just basically follow the treatment you would do for any lease payment.
• 26:59
  SPEAKER_02: All right.
• 27:00
  SPEAKER_02: And then I know we are also seeing a lot of companies entering the sublease market.
• 27:05
  SPEAKER_02: And so how do we think about that, Mark, and maybe say whose perspective you're you're speaking from when you're describing what needs to be disclosed?
• 27:13
  SPEAKER_00: Well, that's a good point.
• 27:15
  SPEAKER_00: And we are seeing we're getting a lot of questions about subleasing.
• 27:18
  SPEAKER_00: Certainly, if people haven't been actually subleasing, they're certainly trying to sublease their properties and they're interested to know how that's presented and disclosed and PNL.
• 27:28
  SPEAKER_00: So whenever you're talking about a sublease, you're basically always talking about a lessee that happens to be acting in the role of also a lessor because they're trying to sublease out this leased in property.
• 27:39
  SPEAKER_00: So the basic question we often get is gross versus net.
• 27:43
  SPEAKER_00: And as I mentioned before, one of the disclosure requirements is to disclose the gross income separately from the head lease expense, right?
• 27:52
  SPEAKER_00: So we know what to do from a disclosure perspective.
• 27:55
  SPEAKER_00: Interestingly, the standard doesn't actually address the presentation in the PL, right?
• 28:01
  SPEAKER_00: So, you know, when it comes to the presentation of the PL, I guess there are potentially two views, right?
• 28:06
  SPEAKER_00: One view is gross, the other view is net.
• 28:09
  SPEAKER_00: Gross would always be acceptable, point blank, right?
• 28:11
  SPEAKER_00: It offers better information to the users, and it does follow the balance sheet because on the balance sheet, in most cases that you have a sublease, you're going to leave the lease liability on the books for the head lease, and you'll just record the sublease income typically on an operating lease on a straight line basis, you know, as a less swore would.
• 28:29
  SPEAKER_00: So the balance sheet is gross.
• 28:32
  SPEAKER_00: Um, if you want to do the PL gross, that would be consistent with that, and we think that's always acceptable.
• 28:37
  SPEAKER_00: Um, we have also accepted perhaps a net presentation on the income statement.
• 28:43
  SPEAKER_00: Again, in the footnote, you still have to disclose the gross cash flows, right?
• 28:47
  SPEAKER_00: We've accepted that because in the income statement, we know the standard itself does talk about from a lesores perspective.
• 28:54
  SPEAKER_00: When lesaurs have, let's say, sales type leases or direct financing leases.
• 28:58
  SPEAKER_00: The question is, should they show those cash flows as gross revenue and cost of goods sold or just as a net number?
• 29:05
  SPEAKER_00: And the standard gives you some discretion there depending on what's your business model, right?
• 29:10
  SPEAKER_00: So here too, we think in the PL, consider what your business model is, right?
• 29:15
  SPEAKER_00: If it's just a one-off transaction, then perhaps net would be okay.
• 29:19
  SPEAKER_00: If if somehow this is really what you're doing for a living, right?
• 29:23
  SPEAKER_00: Which could be the case, right?
• 29:26
  SPEAKER_00: If you if you're if what that's what you're doing for a living, then certainly gross be a better presentation.
• 29:31
  SPEAKER_00: But in terms of the PL, there's a little bit of diversity perhaps in approaches that should be tied to the economics.
• 29:36
  SPEAKER_02: All right, very helpful.
• 29:38
  SPEAKER_02: So then I think we've covered most of our topics today for today, but I do have a few final wrap-up questions.
• 29:45
  SPEAKER_02: And first ones are my favorite news segment, which I don't think either of you have been lucky enough to participate in the past, but it's my new segment of Stump the Guest.
• 29:56
  SPEAKER_02: So I have two questions for you.
• 29:57
  SPEAKER_02: So you have two chances to get these right.
• 30:00
  SPEAKER_02: So the first one is that ASU 201602 was sort of the original guidance that led to 842.
• 30:09
  SPEAKER_02: But how many subsequent amendments have there been since that was issued?
• 30:14
  SPEAKER_00: I'll go first, but I'll just give the guess.
• 30:15
  SPEAKER_00: I'll say six.
• 30:16
  SPEAKER_02: All right.
• 30:17
  SPEAKER_02: And Suzanne?
• 30:18
  SPEAKER_03: Yeah, I'm similar, but I will go seven.
• 30:23
  SPEAKER_02: All right.
• 30:24
  SPEAKER_02: So then the question is, you know, are you allowed to go over or not?
• 30:27
  SPEAKER_02: But anyway, I'll double check the answer and then we'll find out who is closer.
• 30:35
  SPEAKER_02: Fact check.
• 30:36
  SPEAKER_02: Good guesses, Mark and Suzanne.
• 30:38
  SPEAKER_02: And you're both so close, but looks like you're stumped.
• 30:41
  SPEAKER_02: The correct number was eight.
• 30:47
  SPEAKER_02: All right, so here's the second one.
• 30:49
  SPEAKER_02: This one I think you guys are gonna get, actually.
• 30:51
  SPEAKER_02: So, how many members were there on the transition resource group for leases?
• 30:56
  SPEAKER_02: I'll I'll go first this time.
• 30:58
  SPEAKER_03: I I I'm sorry, I don't know, but I'm guessing 15.
• 31:03
  SPEAKER_03: All right, Mark.
• 31:04
  SPEAKER_00: The transition resource, I think that's a trick question because I don't think there was one for leases, unlike revenue.
• 31:11
  SPEAKER_00: Ah, it's a trick question.
• 31:12
  SPEAKER_00: So I will final answer, zero.
• 31:15
  SPEAKER_02: Yes.
• 31:16
  SPEAKER_02: Oh my gosh.
• 31:18
  SPEAKER_02: Well, it was intended to trick you, Suzanne, and I actually like your guess.
• 31:22
  SPEAKER_02: So, but Mark on this one, I will confirm, was correct.
• 31:25
  SPEAKER_02: There was not, unlike other recent news standards, there was not a transition resource group.
• 31:30
  SPEAKER_02: So it's very much a trick question.
• 31:32
  SPEAKER_02: So now I'll go to a very easy question.
• 31:34
  SPEAKER_02: No tricks here.
• 31:35
  SPEAKER_02: Um, if our listeners want to know more about leases, where's or more about leases in general, but specific to uh presentation and disclosure, where should they go look for more guidance?
• 31:46
  SPEAKER_03: Yeah, so actually for leases, what we talked about today, the the new leasing guidance, ASC 842, we have that in our leases guide that you can find on Viewpoint.
• 31:57
  SPEAKER_03: If you're a private company and you're still doing 840, which we didn't touch on today, but we still have that in our financial statement presentation guide.
• 32:06
  SPEAKER_02: All right, perfect.
• 32:07
  SPEAKER_02: Thank you.
• 32:07
  SPEAKER_02: And then final, final question is I know you guys both spent a lot of time talking to companies dealing with all a variety of leasing issues, presentation and disclosure and others.
• 32:18
  SPEAKER_02: And so as you're thinking about private companies that are getting ready to adopt this guidance, what is the advice that you would give?
• 32:27
  SPEAKER_02: And uh, Mark, I'll have you go first.
• 32:30
  SPEAKER_00: Well, I think that the um one of the most time-consuming tasks that we found from the public companies was just gathering the information on all your leases.
• 32:39
  SPEAKER_00: Maybe that'll be a little bit of a lesser challenge for private companies, but nevertheless, you know, just gaining a good understanding, even finding all the documentation, right, and making sure that you're ready to adopt the standard when it goes live is probably the most important thing to do.
• 32:56
  SPEAKER_00: Just get the information, right?
• 32:58
  SPEAKER_03: Good advice.
• 32:58
  SPEAKER_03: And Suzanne?
• 33:00
  SPEAKER_03: Yeah, similar to around Mark's themes, but I would say start early.
• 33:04
  SPEAKER_03: Don't underestimate the effort that it's gonna take.
• 33:08
  SPEAKER_03: I know it's effective in 2022 for private companies, you know, in their year-end financial statements, but it's a good idea to get going on it just to gather all the information.
• 33:21
  SPEAKER_03: Also, don't underestimate the disclosures that you have to make that Mark went through today.
• 33:27
  SPEAKER_03: I think public companies found that there was a bit more work there to get all the info needed for disclosures as well.
• 33:35
  SPEAKER_02: All right.
• 33:35
  SPEAKER_02: And then final, final question.
• 33:36
  SPEAKER_02: Now I'm like Mark that keeps saying the final question, but this one really is.
• 33:40
  SPEAKER_02: So any best practices you would share with for companies that have adopted the standard, now they're sort of in you know, business as usual operations, anything that you see that companies could, you know, that you see doing well that other companies may want to consider?
• 33:56
  SPEAKER_03: I would say just back to disclosure again, just make sure you're having really clear, transparent disclosure.
• 34:02
  SPEAKER_03: Because like Mark mentioned, that is the area where we're seeing um comments raised.
• 34:08
  SPEAKER_03: So always, I think that's always a good idea for everything.
• 34:11
  SPEAKER_03: But yeah, transparent disclosure would be my tip.
• 34:15
  SPEAKER_03: Good advice.
• 34:16
  SPEAKER_00: If I can give one more tip, yes, definitely.
• 34:19
  SPEAKER_00: Um you know, in this era of changing economic economic circumstances with COVID and right now and whatnot, excuse me, companies may not have expected to have as many, you know, either lease modifications or triggers for reassessment, you know, right away after adopting the standard as they may have thought.
• 34:39
  SPEAKER_00: So, really developing processes to make sure you're capturing all this information on a timely basis, I think is just something companies should be aware of, because like I said, circumstances have been changing rapidly, perhaps more than expected.
• 34:54
  SPEAKER_02: All right, great advice from both of you.
• 34:56
  SPEAKER_02: And as always, thank you for all your insights.
• 35:00
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• 35:02
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• 35:13
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• 35:37
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