Accounting Changes Snapshot

Presented by

Shawn Halladay

Managing Director

The Alta Group

March 23, 2012

Topics

The current environment What is changing? Market impact Engaging the customer Lessor concerns

The Current Environment

FAS 13 bifurcation of products

o Operating lease (off balance sheet)

o Capital lease (asset and liability)

o Bright line tests/straightforward

Off balance sheet benefits

o Financial statements/ratios

o Simplicity

o Level of decision-maker

o Affordability

What is Changing?

ED product FAS 13 product

Not retained Operating lease

Right-of-use lease Capital lease

What is Changing?

All leases are capitalized (lessee)

o Asset and liability on balance sheet

o Amortization and interest expense

Lessor and vendor accounting models are modified

o Receivable and residual approach

o Sales-type leases affected

Market Impact

•Lessor consequences and responses

•Lessor accounting requirements

Proposed accounting

changesLessee impact

Market Impact

Loss of off balance sheet financing

o Ratios and performance metrics

o Timing of expense

Additional effort

o Tracking assets and liabilities

Market shifts

o Decision process

o Transition

o Let the hunt begin!

Engaging the Customer

Engaging the Customer

Proactive approach

o Address concerns

o Share perspective

Engaging the Customer

Needs focus

o Cash flow

o Asset utilization

o Financial factors

o Tax concerns

Customer feedback

Customer resources

Lessor Concerns

?????

Receivable & residual approach

Lease receivable for right to receive lease payments

Allocate book value of asset between leased portion and retained (residual) portion

Asset BV x Lease receivable/FV of Asset = Derecognition Amount

Profit = Lease receivable – Derecognition Amount

Residual is accreted

Example A lessor manufactures a machine for $7,500 and enters into a 3-

year lease with annual payments due at the end of the year of $2,400. The machine’s fair value is $10,000 at lease commencement with an estimated residual value at the end of the three years of $4,770. The implicit lease rate is 7.9%, and the present value of the lease payments is $6,200.

Asset BV x lease receivable/FV of asset = derecognition amount

$7,500 x $6,200/$10,000 = $4,650 (derecognition amount)

$7,500 - $4,650 = $2,850 (allocated residual amount)

Lease receivable – derecognition amount = profit at commencement

$6,200 - $4,650 = $1,550 (profit at commencement)

Practice Issues

Loan with balloon

Sales-type lease

Receivable and residual

Receivable $ 6,200 $ 6,200 $ 6,200

Balloon/residual $ 3,800 $ 3,800 $ 2,850

Net investment $ 10,000 $ 10,000 $ 9,050

Practice Issues

Loan with balloon

Sales-type lease

Receivable and residual

Finance income $ 1,970 $ 1,970 $ 1,727

Sales profit $ 2,500 $ 2,500 $ 2,743

Net investment $ 4,470 $ 4,470 $ 4,470

17

Operational Implications

Residual assets

Revenue recognition

Impairment

18

Operational Implications

Modifications

Renewals/payoffs

Lessee data requests

Management reporting

Disclosure requirements

Processes, procedures, and internal controls

19

System Issues

Front-end integration

Different information requirements

Different calculations

Multiple net investment links

New output

Scalability

Product Inventory

Standard economic products

Funding products

20

21

Implementation – Planning

Project team and definition

Timeline

Systemic impact assessments

Strategic modeling

Get to work

22

Micro Frame of Reference

Intermediate impact assessments

Business interpretation of changes/needs

Internal and external stakeholder buy-in

Organizational integration

Resources

Current and near-term budgets

Transition

6

Micro Frame of Reference

System impact assessment

Change analysis

Front-end versus back-end

Vendor readiness

Application hurdles

Process versus output changes

Scope resolution

6

Micro Frame of Reference

o Cutover

o Parallel/dual

o Transition

o Classification

o Mapping

o Rebooking/conversion

o Restatement

Approach

Tool availability

Implementation – Transition

25

Simple versus total retrospective

Product identification

Classification difficulties

Mapping

Prior data capture

Fair value assessments

26

Implementation – Planning

Project team and definition

Timeline

Systemic impact assessments

Strategic modeling

Get to work

27

Conclusion

Questions and answers