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Preparing for ASU 2016-02 Lease Adoption: Key Steps for Non-Public Entities

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Non-public entities must comply with ASU 2016-02, effective in 2020, bringing all leases onto the balance sheet. Delaying preparations can lead to complications. Start planning now by forming a task force to engage your organization, understanding the distinction between financing and operating leases, and compiling an inventory of current leases. Assess necessary technology changes and consult with stakeholders to address potential covenant modifications. Ensure consistent reporting and disclosures post-adoption to maintain financial integrity.

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Preparing for ASU 2016-02 Lease Adoption: Key Steps for Non-Public Entities

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  1. ASU 2016-02 Leases

  2. When is it effective? Non Public Entities must adopt beginning in 2020

  3. Don’t Delay Start Planning now • Suggestions for Implementation • Form task force or steering committee; designate individual to champion – engage entire organization • Learn the standard - Financing vs. Operating leases • Compile inventory of leases • Identify potential changes to internal controls • Assess Technology requirements • Discuss with stakeholders • Audit Committee • Lenders etc. May require modifications to covenants • Decide on transition method – including practical expedients • Post adoption considerations

  4. ASU 2016-02 All leases now on Balance Sheet

  5. Definition of a lease • Agreement that conveys the right to control the use of an identified asset for a period of time in exchange for consideration; • Right to obtain substantially all the economic benefits from the asset • Right to direct the use of the asset

  6. What leases to you have? • Copiers, computers and other small office equipment • Autos • Machinery • Real Estate • Are there leases embedded in service contracts? Maybe

  7. Internal Controls • How are leases processed/approved today? • How are they tracked/maintained • Manually or electronically? • Centralized or by location/business unit? • How are modifications or amendments handled? • Reporting to lessors?

  8. IT Considerations • Volume of lease transactions • Operating leases - principal and interest treated differently than prior GAAP • Can fixed assets system handle depreciation? • Disclosure requirements Is Excel Enough?

  9. Communications • Have discussion begun with; • Audit committee • Lenders – do covenants need to be rewritten? • Lessors • modification to existing agreements • do you need information? • Within Company • Legal, Tax, Financial Planning & Analysis, Treasury, Facilities, Procurement • Employee Training

  10. Transition • Restate 2019; adjustment to 1/1/2019 Retained Earnings • consistent disclosures • consistent ratios & metrics (EBIT, EBITDA, GP) • Do not restate 2019; adjustment to 1/1/2020 Retained Earnings • duplicate disclosures/systems & methods – need to maintain old GAAP disclosures • inconsistent ratios & metrics • Practical Expedients Package - all or none • Whether an expired or existing contracts are or contain leases • Classification of any expired or existing lease • Indirect Cost for any existing leases

  11. The Road Ahead • Adoption is the race to the starting line • Solutions need to comprehend post adoption • How to handle • New leases & terminations of existing • Modifications • Disposals / return of equipment • Changes to office space, etc. • Communication among parties

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