How should I handle GAAP/IFRS in TRIRIGA – Updated to include 10.5.3

Both FASB and IASB released their own versions of leasing standards making Lease Accounting the latest buzzword in the industry today. If you are an organization with a substantial lease portfolio, the odds are that you have already initiated measures to comply with these guidelines that will become applicable as early as 2019.

As a matter of fact, both FASB and IASB initially started out with the idea of coming up with a single lease accounting rule in early 2010 but agreed to disagree (in early 2014) in certain areas and as a result, dropped the idea of a uniform standard.

This has made the reporting process all the more challenging for organizations that are bound by the reporting requirements of both U.S GAAP and IFRS, in particular. While it’s true that there are quite a few common points in both standards, the areas in which they differ pose certain complications for such entities since there is some uncertainty as to whether they have to maintain two separate books of accounts to fulfil the requirements under each standard. To clear this air of ambiguity, we will explore both the commonalities and differences in the reporting requirements under GAAP and IFRS and discuss how IBM TRIRIGA can help achieve compliance under both these guidelines.

What is common

  • Definition of a lease
  • Recognition of lease assets and lease liabilities in the balance sheet, initially measured in the same way
  • Carry forward of previous lessor accounting requirements

What is not common

Some of the major differences between the GAAP and IFRS model include the following:

  • Accounting Model – While FASB has proposed to continue with the dual accounting model wherein the lease classification test is based on current U.S. GAAP classification criteria, IASB has completely removed such lease clarification tests and now requires all leases reported on the balance sheet to be treated as Finance leases.
  • Measurement of lease assets – Under the FASB model, these former off-balance sheet leases will end up with a slower rate of depreciation as against the IASB model, which requires the leases to be depreciated on a straight line basis. Consequently, the carrying amount of lease assets as well as the reported equity under the FASB model will be higher than what will result under the IFRS 16 methodology.
  • Presentation of Lease Liabilities –The organization is expected to present lease liabilities relating to former on and off balance sheet leases as separate line items under the FASB model while there is no such compulsion under IFRS 16, as IASB expects the organization to make such distinction only if it considers it to be relevant in regards to gaining a better understanding of its financial position.

How can IBM TRIRIGA help

IBM TRIRIGA, being the leader in the IWMS space in the industry today, has come out with its latest version, IBM TRIRIGA Real Estate Manager 10.5.3, which will enable you to accelerate compliance with both the FASB and IASB leasing standards. Some of the newly added features in the TRIRIGA Real Estate Manager for complying with these leasing standards are listed here:

  1. Segregation of duties: With the 10.5.3 release it comes with 2 mandatory roles OOTB: Lease Accountant, and Lease Administrator. The Lease Administrator role can only create leases and assign payments. Upon completion of these functions, the Lease Administrator will submit the lease for review by the Lease Accountant. The Lease Administrator has read-only access to the Accounting tab. The Lease Accountant only has editable access to a lease’s Accounting tab to make updates to the financial data prior to Activating the lease. The Lease Accountant has read only access to the other tabs (General, Contacts, Location, and Payments.) This access allows the Lease Accountant to perform reviews and analysis on a lease.

After the lease has been activated by the Lease Accountant, the Lease Administrator can perform amendments and renewals, and terminate the lease. However, these modifications to the lease will require submission to the Lease Accountant for their review and the possible remeasurement and reclassification of the lease. Any changes made by the Lease Administrator will require review and approval by the Lease Accountant. The Lease Accountant can also make modifications to the lease if the “reasonable certainty” of an option changes, or there is a change in the Fair Market Value, Incremental Borrowing Rate, or the Residual Value Guarantee. More detail regarding these modification processes are presented later in this guide.

  1. Lease classification set as Finance and Operating (instead of Type A and Type B that appeared in the earlier versions) based on the lease treatment calculation. Additionally, for GAAP, the question “No alternative use of specialized asset to lessor at end of lease term” has been added under the FASB Treatment section to determine the lease classification.

TRIRIGA also allows the user to override the lease classification from Finance to Operating if an override comment is provided in the Management Assumptions field. The Override Lease Classification option is shown only if the lease classification is Finance.

  1. IBM TRIRIGA supports the Re-measurement logic under IFRS by letting the user choose the asset measurement methodology from three options (At amortized cost, FV under IAS 16 and FV under IAS 40), which are provided in a drop-down menu format for the question “Under IFRS, how will company re-measure the asset?”

When “FV under IAS 40” is selected for instance, TRIRIGA allows you to update the Fair Value of the lease asset minus the amortization benefits of such enhancements in fair market value. However, the finance schedule for the calculation of this option is not supported by TRIRIGA and it needs to be done by exporting it to Microsoft Excel.

  1. IBM TRIRIGA 10.5.3 allows organizations to adopt the new standards either individually on a lease to lease basis or for multiple leases all at once using the Review Lease Assumptions process from the Lease Portal. This function allows the user to regenerate the Operating or Finance schedules from the Look Back Fiscal Period that is to be defined in the Application Settings. The default settings for the Look Back Fiscal Period has been set as two years of history using the new standard, as per the FASB/IASB guidelines.
  1. Lease Modifications – TRIRIGA 10.5.3 introduces a revised process for recording lease modifications which includes a Modification Effective Date that allows the fiscal period in which the changes should be reflected to be determined by the Lease Administrator or Lease Accountant. There are 4 modification types in 10.5.3: Data Revise, Change in Assessment, Amendment, and Change in Contractual Factors. Due to the new separation of role duties in 10.5.3 only the Lease Accountant will be able to perform a Change in Assessment, and a Change in Contractual Factors; while only the Lease Administrator is able to perform an Amendment. Both roles are allowed to perform a data revision.

See Screenshots Below:

Lease Administrator

Lease Accountant

  1. If an organization has a multinational lease portfolio, IBM TRIRIGA can help report local accounting standards. This can be done by either setting up local reporting during the creation of a new lease or adding local reporting to existing lease records.
  1. Journal Entries: Standard OOTB Journal Entries cover the basic entries needed for the Lease Accounting Life Cycle such as:
    • Lease Activation
    • Modifications
    • Terminations
    • Expirations
    • Monthly Straight-lining
    • Interest
    • Amortization postings
    • Principal reduction

Customized Journal entries may be created using the Journal Entry Setup process. Once all Journal Entries have been created, the Journal Entry Processing procedure should be followed in each period. The result of this procedure will be the creation of a Data Transfer Object (DTO) file that will load into your ERP General Ledger. After all Journal Entries have been processed, the lease accounting period should be closed.

With its comprehensive range of features and capabilities, there is no doubt whatsoever that IBM TRIRIGA 10.5.3 can help you in achieving full compliance with both the FASB (GAAP) and the IASB (IFRS 16) guidelines. If you have any further questions relating to FASB/IASB, reach out to the IBM TRIRIGA experts at ValuD at sales@valudconsulting.com.

Lease Classification

It has now been well over a year since both the FASB and IFRS organizations have finalized their guidance on the future of lease accounting which is effective beginning in 2019 for publicly traded companies. The tasks to move a company’s leases onto their Balance Sheet can be overwhelming considering all the necessary steps to reach this goal. Fortunately, the decisions related to lease classification have not drastically changed.

US FASB Topic 842

The US FASB Topic 842 will continue to allow for lease classification as either Operating or Finance (previously considered Capital Leases under Topic 840). However, a 5th criteria was added to the existing four possible criteria that could render a Finance classification. In addition, the prior bright lines from Topic 840 no longer exists. The new standard will require more judgement but also allow more flexibility in the classification decision.

If any one of the five below criteria are met, a lease would be considered a Finance Lease. If none are met, the lease would be considered an Operating Lease:

  • Ownership of the underlying asset transfers to the Lessee by the end of the Lease Term.
  • The lease continues a Purchase Option which the Lessee is reasonably certain to exercise.
  • The lease term is for a major part of the remaining economic life of the underlying asset.
  • The present value of the lease payments and any residual value guaranteed by the Lessee is greater than or equal to substantially all the fair value of the asset.
  • The asset is of such a specialized nature that it will not have an alternative use for the Lessor at the end of the Lease Term. (new criteria)

As mentioned above, previous bright lines for application of these criteria have been abandoned under the new guidance. However, there are guidelines for the application of these new terms:

Major Part >/= 75%
Substantially all >/= 90%
Reasonably certain >/= 90%

The elimination of bright lines was intended to allow additional factors to be considered in applying judgement to classification decisions that cannot be when bright lines are mandated.

No matter which lease classification is determined, both types of leases will require a Right of Use Asset and a corresponding Lease Liability be calculated and presented on the Balance Sheet.

One of the practical expedients a company may elect under Topic 842 will prevent the reassessment of lease classification of existing leases during the two-year transition period prior to the adoption date. Leases classified as Capital Leases under 840 will become Finance Leases. Operating Leases will remain as Operating Leases but will require the application of Topic 842 treatment.

On a final note, a company may elect to treat leases with a lease term of 12 or less months and no purchase option which the Lessee is reasonably certain to exercise, as short-term leases. These short-term leases will not be reported on the Balance Sheet.

IFRS 16

One of the major differences between US FASB Topic 842 and IFRS 16 is the classification of all leases under IFRS 16 as Finance Leases. A lease classification test will not be the determining factor of whether a lease will be presented on the Balance Sheet. Instead, any lease contained in a contract must be reflected on the Balance Sheet as a financing arrangement.

IFRS 16 also allows companies to elect by class of underlying asset that leases with a term of 12 or less months may remain off the Balance Sheet.

ValuD’s team of lease accounting experts can assist you in understanding the lease accounting guidelines and set you on the path of FASB compliance. For more information, contact us at info@valudconsulting.com.

Lease Accounting Practical Expedients

The scope of the new Lease Accounting Standards for both U.S. and international accounting can have a significant impact on companies with any number of leases. Attempts were made by both the U.S. governing body, Financial Accounting Standards Board, and the international body, International Accounting Standards Board, to converge the leasing guidance, but were not successful. During the deliberation period, both boards met with financial statements users to understand their needs and what changes to financial statements would enhance their comparability. Feedback was also received from preparers to grasp the impact and feasibility of the original requirements. From those meetings a set of practical expedients were established that will decrease the burden on financial statement preparers while still providing sufficient information for financial statement users.

FASB Topic 842 Practical Expedients

The FASB guidance, ASU Topic 842, does allow two sets of accommodations as a means of sufficing the needs of users and preparers. Two packages of practical expedients have been established which are applicable only to the comparative transition period for both the lessee and lessor. In addition, new accounting policies can be elected which are applied to both the transition period and all subsequent periods under the new standard.

The first package of practical expedients has three components that must be applied in their entirety as a package to all leases that commenced prior to the adoption date[1].  The purpose of these allowances is to reduce the undue burden of reviewing the details of every existing contract.

  • The first component in this practical expedient package will allow an entity to accept the original determination of whether or not a contract contained a lease and will not require a subsequent review of all existing or expired contracts.
  • In addition, the original lease classification may be accepted so that operating leases will convert as operating leases under Topic 842 and capital leases will convert to finance leases.
  • Finally, under the new standard, the definition of Initial Direct Costs has changed. However, the entity will not have to reassess the Initial Direct Costs assigned to leases under the previous leasing guidance to extract those components no longer included, but may accept the values initially assigned.

The second practical expedient may be elected independent of the first practical expedient but should also be applied to all existing and expired leases from the Lessee and Lessor perspective. This election will allow the entity to use hindsight in judgements that impact the lease term, such as the renewal and purchase option, as well as any asset impairment that would impact the asset valuation[2] .

The second set of accommodations are elections that would be established as accounting policies.  The lessee may elect to not apply the new standard requirements to Short-term leases. These would be identified as leases with a term of 12 or less months which are not reasonably certain of exercising any available renewal options that would extend the term past 12 months[3].  The application of this policy would be based on the class of underlying asset and would not be lease specific. Instead, Short-term leases would be straight-lined over the lease term.

The other accounting policy election would allow a Lessee to consolidate lease and nonlease components into one lease component, instead of separating them[4]. This policy also must be established for a class of underlying assets and cannot be applied to specific leases. Even though this policy would appear to reduce the burden of breaking these items out, the offset is nonlease components will be reported on the Balance Sheet. If nonlease components are a significant value, the impact to the Balance Sheet could also be significant.

IFRS 16 Practical Expedients

Similarities and differences exist between the practical expedients provided under the new standards between US GAAP and IFRS. Like US GAAP, IFRS 16 allows an election for the Lessee/Lessor to “grandfather” the lease assessment applied to contracts with an effective date prior to the adoption date[5].  IFRS 16 must still be applied to those contracts identified as containing leases.

Two accounting policy elections are also available under IFRS 16[6]. Similar to the Short-term policy election under US GAAP Topic 842, IFRS 16 allows for an accounting policy to exempt leases with a term of 12 or less months from the application of the new standard based on the underlying asset class during the transition period and all periods subsequent to the application date.

However, IFRS 16 offers an additional accounting policy election for low value assets that may be applied on an individual lease basis. Even though this policy is not applied on the basis of underlying asset classes, it should establish the criteria for low-value items (suggested bright-line of $5,000 USD). The application of the accounting policy would need to be on a consistent basis during the transition and subsequent periods. The valuation criteria would not include an aggregate value of the assets included on a lease, but rather each asset could be viewed on an individual unit cost. Therefore, even significant purchases of low-value assets could still be exempt from the application of the IFRS 16 guidance.

Under IFRS 16, there are restrictions on the practical expedients which can be applied based on the implementation approach. There are two approaches; the Retrospective Approach and the Modified Retrospective Approach. If IFRS 16 will be adopted using the Retrospective Approach, none of the practical expedients or accounting policy elections are available. Thus, one would be required to review all expired and existing contracts during the comparative and transition periods for strict application of IFRS 16 for lease classification and valuation of the leases. However, if implementing under the Modified Retrospective Approach, all the practical expedients and accounting policy elections are available.

There are pros and cons to the practical expedients and accounting policy elections available under each set of standards that must be weighed by each company to determine which ones benefit them without compromising the comparability of their financial statement.

[1]FASB ASU 2016-02, Topic 842, Leases, 842-10-65-1(f)
[2]FASB ASU 2016-02, Topic 842, Leases, 842-10-65-1(g)
[3]FASB ASU 2016-02, Topic 842, Leases, 842-20-25-2
[4]FASB ASU 2016-02, Topic 842, Leases, 842-10-15-37
[5]IFRS 16.C3, C4
[6]IFRS 16.5–8