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SAB 74 DISCLOSUREANALYSIS FORLEASE ACCOUNTINGTop 100 US Public CompaniesRanked By Leasing ObligationsASC 842 LEASEACCOUNTING STANDARDS
TABLE OF CONTENTSExecutive Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3SAB 74 Disclosures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3Key Findings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4Detailed Analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5Balance Sheet Impacts. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5Income Statement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6Cash Flow Statement. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6Early Adoption. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6Transition Method. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6Practical Expedients. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7Implementation Progress. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8Project Team. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9Software Evaluation And Selection. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10Policies & Controls. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11Lease Accounting Change . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12SAB 74 Disclosures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13Additional References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14Top 100 Us Companies Ranked By Leasing Obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 2010-2018 LeaseAccelerator, Inc. All rights reserved. This document is the copyrighted work of LeaseAccelerator, Inc.
EXECUTIVE SUMMARYSAB 74 DISCLOSURESAs the implementation deadlines for ASC 842 grow closer, public filers will be required to include a discussionof the potential future impacts to their financial statements from the new lease accounting standards. SEC StaffAccounting Bulletin Topic 11.M (SAB 74) requires SEC filers to disclose the effects of accounting standards thathave been announced but not yet adopted. The guidance from the bulletin encourages registrants to considerdisclosing: A brief description of the new standard, the date that adoption is required, and the date that the registrant plansto adopt, if earlier. A discussion of the methods of adoption allowed by the standard and the method expected to be utilized by theregistrant, if determined. A discussion of the impact that adoption of the standard is expected to have on the financial statements of theregistrant, unless not known or reasonably estimable. In that case, a statement to that effect may be made.Disclosure of the potential impact of other significant matters that the registrant believes might result from theadoption of the standard (such as technical violations of debt covenant agreements, planned or intended changesin business practices, etc.) is encouraged.In an effort to assist the industry with accelerated adoption of the new lease accounting standards, LeaseAcceleratorcompiled 100 examples of SAB 74 disclosures from SEC registrants over the past 15 months. We focused on thetop 100 US public companies as ranked by the total leasing obligations tabularized in the footnotes of annualfilings. The source of the data was 10-Q and 10-K filings submitted between January 1, 2017 and March 31,2018.TOP 100 US PUBLIC COMPANIES RANKED BY LEASING OBLIGATIONS3
KEY FINDINGSEarly AdoptionWith the revenue recognition standard (ASC 606) a number of companies including Alphabet, Microsoft, GeneralDynamics, Ford, and Raytheon were early adopters. Only one of the 100 companies analyzed, Microsoft,adopted the standards early. No other companies stated their intention to early adopt.Transition ApproachAt the time these disclosures were analyzed, the only available transition approach for lessees was the modifiedretrospective approach, so companies either said they would elect that approach or did not comment on theapproach. However, a new transition approach was proposed in November 2017 and approved in March2018. We expect companies to state their selection of transition method in their next disclosures.Material Impacts to Balance SheetsAs expected, the new right-of-use assets and liabilities being added to balance sheets is expected to be the mostmaterial impact to financial statements. 76% of the Top 100 reported that there will be a material impact resultingfrom the transfer of most right-of-use assets and liabilities on to corporate balance sheets. Another 20% are stillanalyzing the potential impacts of the new standard.Quantitative ImpactsCompanies are still in the process of estimating the definitive size of their leasing portfolios under ASC 842. Only8% provided quantitative estimates of the material impact to the balance sheet, which ranged from 1.2 billion to 13 billion.Limited Impacts to Income Statement and Cash Flow Statements28% of the Top 100 reported that there would not be a material impact to their income statement from ASC 842.Another 66% are still analyzing the impacts. 19% of the Top 100 reported there would be no impact to their cashflow statements and 64% are still analyzing the impact.Implementation ProgressThe level of information disclosed about the progress of implementation efforts is still relatively limited by most filers.Of the companies we analyzed, only 18% stated they are evaluating or implementing new policies and controlsto support the standard. Similarly, amongst the filers we reviewed, only 18% stated they are evaluating or haveselected a lease accounting software application. Only 13% indicated that a project team had been formed toaddress the new standard.4SAB 74 DISCLOSURE ANALYSIS FOR LEASE ACCOUNTING (ASC 842)
DETAILED ANALYSISBALANCE SHEET IMPACTSBALANCE SHEET IMPACTSBalance Sheet Impacts will be MaterialAs expected, the most material impact to financialstatements cited by most filers is the new right-of-useassets and liabilities being added to the balancesheets. 76% of the Top 100 reported that therewill be a material impact resulting from the transferof most right-of-use assets and lease liabilities ontocorporate balance sheets. Another 20% are stillanalyzing the potential impacts of the new standard.Not Material2%Not Stated2%StillEvaluating19%MaterialImpact73%Goldman Sachs and Bank of America were the onlytwo companies in our sample set that indicated that theimpact would not be material. However, other financialinstitutions such as CIT, JPMorgan & Chase ( 10B),and Citigroup ( 5B) did indicate that the balancesheet impact would be material, so there does not appear to be an industry-wide trend for commercial banks.Companies are still in the process of estimating the definitive size of their leasing portfolios under ASC 842. Only 8%provided quantitative estimates of the material impact to the balance sheet, which ranged from 1.2 billion to 13 billion. EXAMPLES OF DISCLOSURE COMMENTS RELATED TO BALANCE SHEETSSEC REGISTRANTEXCERPT OF DISCLOSUREAppleWhile the Company is currently evaluating the timing and impact of adopting ASU 201602, currently the Company anticipates recording lease assets and liabilities in excess of 9.6 billion on its Condensed Consolidated Balance Sheets, with no material impact to itsCondensed Consolidated Statements of Operations. However, the ultimate impact of adoptingASU 2016-02 will depend on the Company’s lease portfolio as of the adoption date.Walt DisneyAs of September 30, 2017, the Company had an estimated 3.3 billion inundiscounted future minimum lease commitments.SouthernSouthern Company has substantially completed a detailed inventory and analysis of itsleases. In terms of rental charges and duration of contracts, the most significant leasesrelate to cellular towers and PPAs where certain of Southern Company's subsidiaries are thelessee and to land and outdoor lighting where certain of Southern Company's subsidiariesare the lessor. The traditional electric operating companies are currently analyzing poleattachment agreements, and a lease determination has not been made at this time. WhileSouthern Company has not yet determined the ultimate impact, adoption of ASU 2016-02is expected to have a significant impact on Southern Company's balance sheet.CharterCommunicationsThe Company expects its leases designated as operating leases in Note 20 will bereported on the consolidated balance sheets upon adoption. The Company is currentlyevaluating the impact to its consolidated financial statements as it relates to otherembedded lease arrangements of the business.TOP 100 US PUBLIC COMPANIES RANKED BY LEASING OBLIGATIONS5
INCOME STATEMENTUnder ASC 842, there is expected to be little impact to the income statement. Operating leases will still bepresented on the same line-item on the income statement, the same as under the current standards, ASC 840. Forfinance leases, which replace capital leases under ASC 840, the interest and amortization will still be presentedseparately. As a result, we expect few of the remaining 66% still evaluating and the 6% that did not comment on theincome statement impacts to find a material impact to the income statement.CASH FLOW STATEMENTThe new standard requires leases to be reported as finance activities on the cash flow statement rather than asoperating activities, which was required under ASC 840. However, this change is not expected to change net cashflows because the decrease in operating activities should result in an equal increase in finance activities. Therefore,we do not expect that many of the 64% of companies still evaluating or 18% that did not comment on cash flowstatements to find that there is a material impact to their net cash flow statements.EARLY ADOPTIONWith the revenue recognition standard (ASC 606) a number of companies including Alphabet, Microsoft, GeneralDynamics, Ford, and Raytheon were early adopters. The lease accounting standard has very few early adoptersthus far. Only one of the 100 companies analyzed, Microsoft, has early adopted.TRANSITION METHODWith other recent accounting changes, such as revenue recognition, much of the focus for SAB 74 disclosures wason the transition approach being adopted. However, until recently, only a modified retrospective approach wasallowed under ASC 842. The modified retrospective method would have required companies to not only transitionat the date of adoption, but also provide reports of their lease data under ASC 842 from the earliest comparativeperiod to the effective date. For example, companies who will adopt on January 1, 2019 would have beenrequired to report their lease data from January 1, 2017 to January 1, 2019 under both ASC 840 and ASC 842.However, on March 7, 2018 FASB voted to offer a simpler transition method that eliminates the need forcomparative reporting. We expect that many companies will choose this approach as it reduces the implementationburden for corporate accounting organizations. Several companies, including Walt Disney and Advance AutoParts, referred to the proposal in their disclosures, though did not state whether they would elect the option ifapproved. We anticipate that now that the proposal has been approved, many SEC files will state which transitionapproach they will use in their next disclosures.6SAB 74 DISCLOSURE ANALYSIS FOR LEASE ACCOUNTING (ASC 842)
PRACTICAL EXPEDIENTSAmongst our sample set, only six companies indicated an intention to elect the practical expedients available underASC 842. Another five companies indicated that they were investigating the practical expedients. However, mostdid not provide any commentary.ADOPTING PRACTICAL EXPEDIENTS100%90%80%70%60%50%40%30%20%10%0%Decided to AdoptEvaluatingNo CommentEXAMPLES OF DISCLOSURE COMMENTS RELATED TO PRACTICAL EXPEDIENTSSEC REGISTRANT EXCERPT OF DISCLOSURETargetWe will take advantage of the transition package of practical expedients permitted withinthe new standard, which among other things, allows us to carryforward the historical leaseclassification. In addition, we are electing the hindsight practical expedient to determinethe reasonably certain lease term for existing leases. While lease classification will remainunchanged, hindsight will result in generally shorter accounting lease terms and useful livesof the corresponding leasehold improvements. We will make an accounting policy electionthat will keep leases with an initial term of 12 months or less off of the balance sheet and willresult in recognizing those lease payments in the Consolidated Statements of Operations on astraight-line basis over the lease term.Duke EnergyUpon adoption, Duke Energy expects to elect the practical expedients, which wouldrequire no reassessment of whether existing contracts are or contain leases as well as noreassessment of lease classification for existing leases. Additionally, we expect to adopt theoptional transition practical expedient allowing the entity not to reassess the accounting forland easements that currently exist at the adoption of the lease standard on January 1, 2019.EquinixThe Company plans to elect the practical expedient that it will not reassess whether anyexpired or existing contracts are or contain leases, the lease classification for any expired orexisting leases or initial direct costs for any existing leases. The Company does not plan toelect the practical expedient to use hindsight in determining the lease term and in assessingimpairment of right-of-use assets.TOP 100 US PUBLIC COMPANIES RANKED BY LEASING OBLIGATIONS7
IMPLEMENTATION PROGRESSThe level of information disclosed about the progress of implementation efforts is still relatively limited by most filers.A significant work effort will be required to comply with the new lease accounting standards by most companieswith portfolios in excess of 100M. Changes will be required to accounting systems, business processes, andfinancial controls. A cross-functional project team will need to be formed consisting of stakeholders that use theleased assets such as Real Estate, IT, and Operations as well as corporate functions that administer the leases suchas Procurement, Corporate Treasury, and Accounts Payable.The project team will need to devise a strategy for identifying all of the leasing contracts across the enterpriseincluding categories such as real estate, IT, fleet, material handling, and other industry-specific assets. Once thepopulation of leases is identified, the contracts for each will need to be identified in order to abstract the datanecessary for accounting. Most companies will implement a new software application designed to perform thespecialized lease accounting required for ASC 842. Once selected, the software application will need to be testedfor functionality, integrated with other financial systems, and rolled out with training to end users.EXAMPLES OF DISCLOSURE COMMENTS RELATED TO IMPLEMENTATION8SEC REGISTRANTEXCERPT OF DISCLOSUREAutoZoneThe Company established a cross-functional implementation team to evaluate and identify theimpact of ASU 2016-02 on the Company’s financial position, results of operations and cashflows. Based on the preliminary work completed, the Company is considering the possibleimplications of the new standard, including the discount rate to be used in valuing newand existing leases, the treatment of existing favorable and unfavorable lease agreementsacquired in connection with previous acquisitions, procedural and operational changes thatmay be necessary to comply with the provisions of the guidance and all applicable financialstatement disclosures required by the new guidance. The Company is also in the process ofidentifying changes to its business processes, systems and controls to support adoption of thenew standard.O’ReillyAutomotiveWe have established a task force, composed of multiple functional groups inside of theCompany, which is currently in the process of evaluating critical components of this newguidance and the potential impact of the guidance on our financial position, results ofoperations and cash flows. Based on the preliminary work completed, we are consideringthe potential implications of the new standard on determining the discount rate to be used invaluing new and existing leases, the treatment of existing favorable and unfavorable leaseagreements acquired in connection with previous acquisitions, procedural and operationalchanges that may be necessary to comply with the provisions of the guidance and allapplicable financial statement disclosures required by the guidance, all of which are areasthat could potentially be impacted by adoption of the guidance.KrogerThis evaluation process includes reviewing all forms of leases, performing a completenessassessment over the lease population, analyzing the practical expedients and assessingopportunities to make certain changes to the Company’s lease accounting informationtechnology system in order to determine the best implementation strategy.DollarGeneralSpecifically, the Company has formed a project team that is developing test plans for itslease accounting system, identifying and evaluating existing contracts for embedded leases,and discussing implementation plans with its lease accounting software vendor, among otheractivities.SAB 74 DISCLOSURE ANALYSIS FOR LEASE ACCOUNTING (ASC 842)
PROJECT TEAMAmongst our sample set, only 13% indicated that a project team had been formed to address the new standard.Leadership of the lease accounting project typically sits within the finance or accounting team. However, unlikemany other accounting change projects, there is a need for a cross-functional enterprise team to address theleasing standards.A significant amount of business process transformation and data collection will be required from both theusers of leased assets and the corporate functions that support the leasing program. The users of leased assetsspan almost every function in the busine
6 SAB 74 DISCLOSURE ANALYSIS FOR LEASE ACCOUNTING (ASC 842) INCOME STATEMENT Under ASC 842, there is expected to be little impact to the income statement . Operating leases will still be presented on the same line-item on the income statement, the same as File Size: 1MB
