Citrin Cooperman Partners Michael Sabatini and Joseph Turkewitz take us through the looming changes in lease accounting.

1. LEASE ACCOUNTING:
Changes are coming
November 16, 2016
FOCUS ON WHAT COUNTS
[ENTREPRENEURIAL]
[PROGRESSIVE]
[SOLUTIONS]

2. PRESENTED BY:
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Mike Sabatini
Audit Partner &
Managing Partner, Long Island Office
Joseph Turkewitz
Audit Partner

3. 3
OVERVIEW
Effective Date:
• Private Companies – Fiscal years beginning after December 15, 2019, and interim periods with fiscal
years beginning after December 15, 2020
• Public Companies - Fiscal years beginning after December 15, 2018, including interim periods within
those fiscal years
• Comparative statements must be restated using a modified retrospective transition method
Comparison of GAAP
Existing New
Balance Sheet
• Leases are classified as either capital or
operating lease
• Only capital leases are recognized on balance
sheet as asset and related liabilities
Lessees will
recognize almost
every lease or
balance sheet
Income & Cash Flow Substantially retains concept of operating versus capital (finance)
leases
The accounting for lessors is largely unchanged

4. CERTAIN SCOPE EXCEPTIONS
• No scope exception permitted for “low value” assets (i.e. computers, copiers, etc.)
• Scope exception for arrangements with a lease term of 12 months or less and does
not include option to purchase underlying asset that the lessee is reasonably
certain to exercise
Caution: The definition of lease term
may include renewal options included
in the arrangement
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5. WHY SHOULD YOU CARE?
Covenant Compliance
• Potential impact on debt service coverage
ratio
• Other financial covenants may be impacted
• Potential impact on working capital
• Compensation arrangements may also be
impacted
Accounting and
Reporting Matters
• Significant judgment and estimates
• New processes and controls to be
implemented
• New or enhanced disclosures
• New asset required to be evaluated for
impairment
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6. PROCESS FLOW
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Determine if
contract contains
a lease
• Separate lease &
non-lease
components
• Identify other key
terms
Determination of
appropriate
classification
Initial and
subsequent
recognition and
measurement

7. WHAT IS A LEASE?
A contract is (or contains) a lease when two criteria are met:
1. The contract explicitly or implicitly specifies the use of an identifiable asset
a) Asset is explicitly or implicitly identified
b) Physically distinct
c) Supplier does not have substitution right
2. The customer controls the use of the asset for
that period of use
a) The right to obtain substantially all of the
economic benefits from using the asset
b) The right to direct the use of the asset
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“A contract, or part of a contract, that conveys the right to control the use of
identified property, plant, or equipment (an identified asset) for a period of time
in exchange for consideration”

8. LEASE AND NON-LEASE COMPONENTS
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OPTIONAL ELECTION
In certain circumstances, an accounting policy election can be made to bundle a
non-lease component with its related lease component
Lease component can be used on its own AND not dependent with other
rights
Separation
Goods and services provided to lessee that are separate from the asset
Examples: Cleaning, security, waste removal and other such common area maintenance charges
Non-lease
Components
Allocation
Arrangement consideration should be allocated between the lease and non-lease
components based on their respective relative stand-alone pricing

9. KEY TERMS IN A LEASE
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Lease Term
• Contractual non-cancellable period
• Lessee options reasonably certain to exercise
• Lessor renewal options are assumed to be exercised
• If lessee subsequently changes lease term assessment, triggers re-
measurement
Lease Payments
Discount Rate
• Rate implicit in lease
• If not readily determinable, use lessee’s incremental borrowing rate
• Nonpublic entities may elect to use risk-free rate for all leases
Fixed payments
Variable lease payments that depend on an index or rate
Lease incentives provided by lessor
The exercise price of an option to purchase the underlying asset if the lessee
is reasonably certain to do so
Penalties for terminating the lease if the lease term reflects the lessee
exercising an option to terminate the lease
Amounts probable of being owed by the lessee under a residual value
guarantee

10. LEASE CLASSIFICATION
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Five criteria: If any of the following apply, the lease is classified as finance;
otherwise classified as operating
1. Ownership of the underlying asset transfers to the lessee at end of lease term
2. An option exists under which the lessee may purchase the underlying asset
and exercise of that option is reasonably certain
3. When the lease does not comment at or near the end of the underlying
asset's economic life, the lease term makes up a major part of the underlying
asset’s remaining economic life
4. The sum of the present value of the lease payments and any residual value
guaranteed by the lessee that is not already included in the lease payments is
equal to or exceeds substantially all of the underlying asset’s fair value
5. NEW: The underlying assets specialized nature is expected to result in it not
having an alternative use to the lessor at the end of the lease term

11. INITIAL RECOGNITION AND MEASUREMENT
ALL LEASES
On Day 1, recognize the following:
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Right-of-Use Asset Lease Liability
Lease liability recognized Present value of future lease payments
Any lease payments rendered prior
to commencement date
Use discount rate previously determined
Direct costs incurred by lessee
Any landlord incentives received

12. INITIAL RECOGNITION AND MEASUREMENT
Initial direct costs are:
• Incremental costs of a lease that would not have been incurred had the lease not been
executed.
• Costs directly or indirectly attributable to negotiating and arranging the lease are not
considered initial direct costs.
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Included Excluded
Commissions Employee salaries
Legal fees resulting from the execution of the lease Internal engineering costs
Lease document preparation costs incurred after the
execution of the lease
Negotiating lease term and conditions
Certain payments to existing tenants to move out Advertising
Consideration paid for a guarantee of a residual asset by
an unrelated third party
Depreciation

13. SUBSEQUENT MEASUREMENT
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Finance Operating
Right-of-Use
Asset
Amortize a straight-line basis
over lease term
• Calculate straight-line lease expenses
(similar to current GAAP)
• Amortize asset of lease term by
difference between straight-line
lease expense and interest expense
Lease Liability
• Record interest expense on the carrying value of the lease liability
• Reduce lease liability as lessee makes lease payments
• Record variable lease payments in period incurred

14. EXAMPLE FACTS
Lease term is for 3 years
Payment schedule
• $200,000 at the end of Year 1
• $300,000 at the end of Year 2
• $400,000 at the end of Year 3
Discount rate is 5%
Present value of lease payments is $808,120
Lessee’s initial direct costs are $30,000
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15. FINANCE LEASE EXAMPLE
Using the example facts (assume no variable lease payments):
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Year Right-of-Use Asset Lease Liability
Beginning
Balance Amortization
Ending
Balance
Beginning
Balance
Interest @
5% Payments
Ending
Balance
1 838,120 279,373 558,747 808,120 40,406 200,000 648,526
2 558,747 279,373 279,373 648,526 32,426 300,000 380,952
3 279,373 279,373 - 380,952 19,048 400,000 -

16. FINANCE LEASE EXAMPLE - SUMMARY
Year 1 Year 2 Year 3 Total
Interest 40,406 32,426 19,048 91,880
Amortization 279,373 279,373 279,373 838,120
Total Expense 319,779 311,800 298,421 930,000
Year 1 Year 2 Year 3 Total
Operating Cash
Flow
70,406 32,426 19,048 121,880
Financing Cash
Flow
159,594 267,574 380,952 808,120
Total Cash Flow 230,000 300,000 400,000 930,000
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17. OPERATING LEASE EXAMPLE
Compute straight-line lease expense
= ($200,000 + $300,000 + $400,000 lease payments +
$30,000 IDC / 3 years
= $310,000
See next slide for interest expense calculations
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18. OPERATING LEASE EXAMPLE
Compute ROU amortization
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Year Lease Liability Right-of-Use Asset
Beginning
Balance
Interest
@ 5% Payments
Ending
Balance
Beginning
Balance
Straight-line
Expense Interest Amortization
Ending
Balance
1 808,120 40,406 200,000 648,526 838,120 310,000 40,406 269,594 568,526
2 648,526 32,426 300,000 380,952 568,526 310,000 32,426 277,574 290,952
3 380,952 19,048 400,000 - 290,952 310,000 19,048 290,952 -
Compute interest expense

19. OPERATING LEASE EXAMPLE - SUMMARY
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Year 1 Year 2 Year 3 Total
Interest 40,406 32,426 19,048 91,880
Amortization 269,594 277,574 290,952 838,120
Total Expense 310,000 310,000 310,000 930,000
Year 1 Year 2 Year 3 Total
Operating Cash
Flow
230,000 300,000 400,000 930,000
Financing Cash
Flow
- - - -
Total Cash Flow 230,000 300,000 400,000 930,000

20. PRESENTATION
Balance Sheet Income Statement
Right-of-use assets are
always noncurrent
Finance lease
• Interest expense (typically below
the line)
• Amortization expense (typically
above the line)
Lease liabilities are classified
as current or noncurrent
Operating lease
• Single operating lease expense
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21. In transition, lessees and lessors are required to recognize and measure leases at
the beginning of the earliest period presented using a modified retrospective
approach.
The modified retrospective approach includes a number of optional practical
expedients that entities may elect to apply:
An entity that elects to apply the practical expedients will, in effect, continue to
account for leases that commence before the effective date in accordance with
previous GAAP unless the lease is modified
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MODIFIED RETROSPECTIVE TRANSITION
• identification and classification of leases that commenced before the effective date
• initial direct costs for leases that commenced before the effective date
• the ability to use hindsight in evaluating lessee options to extend or terminate a lease
or to purchase the underlying asset.

22. DISCLOSURE REQUIREMENTS
HIGHLIGHTS OF WHAT IS NEW
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Qualitative
• Significant assumptions and judgments
- Determination of whether a contract contains a lease
- Allocation between lease components
- Determination of discount rate
• Policy election to not recognize short-term leases
• Policy election to bundle lease components for allocation
purposes

23. DISCLOSURE REQUIREMENTS – CONTINUED
HIGHLIGHTS OF WHAT IS NEW
* The disclosed expense items should include any amounts that were capitalized as part of the cost of another asset, such as
inventory, software development costs, and equipment.
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Quantitative
• For Finance leases, amortization of right-to-use (ROU) assets and interest on lease liabilities (including
capitalized interest)*
• Operating lease expense (including capitalized costs)*
• Short-term lease expense, when term > 30 days*
• Variable lease expense*
• Sublease income
• Gains and losses on sale-leaseback transactions
• Cash paid for amounts included in measurement of lease liabilities, segregated by Finance and Operating
leases and between operating and financing cash flows
• Supplemental noncash information on ROU assets obtained in exchange for new lease liabilities,
separately for Finance and Operating leases
• Supplemental noncash information on ROU assets obtained in exchange for new lease liabilities,
separately for Finance and Operating leases
• Weighted-average remaining lease term, presented separately by Finance and Operating leases
• Weighted-average discount rate for Operating and Finance leases as of the balance sheet date

24. Any questions?

25. Thank You