Question

You have been provided with a significant amount of required and recommended reading material from Ernst & Young’s Academic Resource Center on two relatively recent converged accounting standards that cover revenue recognition and lease accounting. These are major, new converged accounting standards, which were subject to intense scrutiny not only by boards but also by publicly listed companies around the world.

By now, many U.S.-based publicly listed firms have implemented either or both of these accounting standards, and you can see the impact of their implementation disclosed, in detail, in their annual reports on Form 10K and in the footnotes to those financial statements.

In the MPAcc Program at CSU-Global, we believe “seeing is believing.” To that, find a publicly listed company of your choice and locate in its most recent annual report both the disclosures and impacts of implementing either of these two new accounting standards on the financial statements.

Summarize any such related disclosures that you find as part of your initial response and provide a link to the related annual report.

Answer the following points and questions in your initial response:

• Prepare an annotation of what you found in the annual report for your chosen company. (An annotation is a summary of the main points of the implementation of the standard for the company you have chosen to summarize for the class, organized to include a correctly formatted APA reference, where required.)
• Include the following questions in your annotation:
• Problem: What is/was the major application of the standard which your chosen company was required to implement as a result of the new accounting standard? What was different from before, in other words, as a result of your chosen company adopting the new accounting standard?
• Results: What was the result or conclusion of the financial statement impact of implementing the new standard on the results of operations and/or the financial condition of your chosen company?
• Application: How might practitioners or your classmates potentially apply what was covered or is being covered related to implementing that new standard in the annual report in the real world? Be specific.

Answer 1

Lease Accounting – Major movement from ASC 840 TO ASC 842 . Before selecting any company relates to implement this new standard and impact on financial , explain the major difference between two ASC and disclosure in the financial .

As per new rule , companies add huge amount of leases to their balance Sheet . As per Old Stabdard ASC 840 , company just disclose number in their Foot note about operating lease obligation . where as new standard ASC 842.Company has to disclose all operating lease matter into financial statement . As per new standard , thus will be more transparent condition . . This definitely major    carve out off balance sheet accounting .

As per new standard , company has to disclose operating lease on the Balance Sheet . As per old standard , company normally used spread sheet for their lease accounting and they used just for disclosure purpose .

Where as new standard . they need to create Lease Liability . To implement the same , company needs to follow:

1. Get a control on all companies leases and property
2. Company has to do early conversion with stakeholders about impact on financial statement
3. After analysis of impact on Margin , company could use other judgement like lease or purchase of equipment or any other cost saving area

Every company before implement this standard , need to follow :

1. Analyze existing contract and make best use of new lease agreement
2. Define a roadmap to implement and smooth transition

Snapshot OR key point under ASC 842 – new lease accounting ..

Most important word under New lease accounting would be – Right of use- To meet right of use , need to understand about

Identified assets – means assets is physical distinct . lessor does not have substantive rights to substitute the asset

Right of control – mean – the lessee has the right to direct use of the asset + lesse has the right to receive substantially all the economic benefit form the asset

For an operating lease to be capitalized in the balance sheet , right to use asset and lease liability has to be determined by the lessee

Right to use of asset represents initial amount of the lease liability + any initial direct cost and payment made prior to start of lease – any lease incentive

Lease liability represents – the present value of the lease payment using the discount rate specified in the lease . If discount rate not not available then Internal borrowing rate may apply

In case of Subsequent measurement – lease obligation nothing but amortization using effective Interest rate method

In case of finance lease – expenses will be front loaded and create impact on Income statement

Couple of point most important to note –

Contract may be combine of lease and non lease part . as per new guideline , only Lease part are to be accounted .

We have selected one of the public listed company to understand implementation of above standard for our discussion purpose – Company name “ Walgreen”

As   per companies MD&A analysis note - in February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-02, Leases (Topic 842)

So company recently started “ Store Optimization “ program and under this program , company has recognised cumulative pre tax charge to its financial statement in accordance with GAAP and under selling , general & Admin head , they disclose charge of $ 19 million as Lease obligation and othe real asset cost

Important point to note that , The company credit rating impact its borrowing cost , access to capital market and Operating lease cost

Under Operating lease model – lease expenses recognised on a staright line basis over the lease term and under finance lease model – interest on the lease liability is recognised separately from amortization of the right to use of the asset

As per new standard , lessee using a modified retrospective approach which includes a number of optional practical entity can opt for .

This ASU implementation will have a material impact on the company’s financial position . the impact of this ASU is non cash in nature and will not affect the company’s cash flow

In the financial statement – capital lease are recognised within Property plant and Equipment and as a capital lease liability with in accrued expenses and other liability and other non current liability .

Operating lease are expenses on a straight line basis over the lease term