Preparing for the new lease accounting standard can seem like a daunting task. In this webinar, we reviewed how you can handle and prepare to navigate your business through the new lease accounting standard in 2022.

1. Preparing for the New Lease
Accounting Standard
January 26, 2022

2. Manager
dswedits@citrincooperman.com
Daniel Swedits
Partner
jhogencamp@citrincooperman.com
Jennifer Hogencamp
Presenters

3. EFFECTIVE DATES:
▪ Public Companies – Fiscal years beginning after December 15, 2018, including interim periods within
those fiscal years.
▪ Private Companies – Fiscal years beginning after December 15, 2021, amended in June 2020. Early
adoption is permitted.
TRANSITION OPTIONS:
▪ Adopt using a modified retrospective transition method OR optional cumulative effect adjustment to
opening retained earnings (ASU 2018-11).
Overview

4. ▪ Inventory –Gather all lease documents; review agreements for imbedded leases
▪ Costly process if multiple locations/multiple departments with leases; time-sensitive for data gathering
▪ Internal time and resources; training and education; Cost
▪ Operations, Finance, Legal to work together to ensure all leases are identified and procedures in place
if new leases are signed
▪ Lease collection and logging
▪ Software or Excel-system to track and make entries depending on size and complexity (multi-
location, numerous leases)
▪ Validating the data accuracy is critical
Transition-Thoughts

5. “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.”
What is a Lease?
LEASE CLASSIFICATION
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. 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 is equal to or exceeds substantially all of the
underlying asset’s fair value.
5. NEW: The underlying asset’s specialized nature is expected to result in it not having an alternative use
to the lessor at the end of the lease term.

6. COMPARISON OF GAAP
Important Matters to Consider
COVENANT COMPLIANCE
• Potential impact on debt service coverage ratio
• Other financial covenants may be impacted
• Potential impact on working capital
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 /operating leases are just
disclosed in the footnotes
Lessees will
recognize almost
every lease on
balance sheet
INCOME & CASH
FLOW
Substantially retains concept of operating versus capital (finance) leases

7. FINANCE (CAPITAL) LEASES
▪ Balance Sheet
▪ Recognize a right-of-use asset and a lease liability, initially measured at the present value of the
lease payments on the balance sheet
▪ Income Statement
▪ Recognize interest on the lease liability separately from amortization of the right-of-use asset on
the income statement.
▪ Statement of Cash Flows
▪ Classify repayments of the principal portion of the lease liability within financing activities and
payments of interest on the lease liability and variable lease payments within operating activities
in the statement of cash flows
How is the Lease Recorded?

8. OPERATING LEASES
▪ Balance Sheet
▪ Recognize a right-of-use asset and a lease liability, initially measured at the present value of the
lease payments on the balance sheet
▪ Income Statement
▪ Recognize a single lease cost, calculated so that the cost of the lease is allocated over the lease
term on a generally straight-line basis. “Lease expense”
▪ Statement of Cash Flows
▪ Classify all cash payments within operating activities
How is the Lease Recorded?

9. LESSEE ACCOUNTING OVERVIEW
▪ Classification is similar to the classification in FASB ASC 840
▪ Balance sheet presentation – can not present finance leases/operating leases on same line and must
break out each on face or in notes
▪ Income statement presentation – single lease expense presented in income from continuing
operations
How is the Lease Recorded?
Balance Sheet
Income
Statement
Cash Flow
Statement
Finance ▪ Right-of-use (ROU)
asset
▪ Lease liability
▪ Amortization
expense
▪ Interest expense
▪ Principal-financing
interest-operating
Operating ▪ Right-of-use (ROU)
asset
▪ Lease liability
▪ Single lease
expense on a
straight-line basis
▪ Lease expense-
usually operating

10. MEASUREMENT OF THE LEASE LIABILITY AND RIGHT OF USE ASSET:
▪ Lease liability
▪ Equal to the present value of the lease payments:
– Fixed payments
– Variable lease payments that depend on an index or rate (i.e. CPI) measured at the rate at lease
commencement date. Variable payments not tied to such an index are excluded and recognized in the
period incurred.
– The exercise price of an option to purchase the underlying asset if the lessee is reasonably certain to
exercise the option
▪ Discount Rate (Determining Present Value of Lease Payments)
– The rate that the entity uses to discount future lease payments should be the rate implicit in the lease if it
is readily determinable
– If not determinable, the entity should use its incremental borrowing rate
Lease Liability

11. MEASUREMENT OF THE LEASE LIABILITY AND RIGHT OF USE ASSET:
▪ Right of Use Asset (ROU)
▪ The initial measurement of the lease liability as described on previous slide
▪ Any lease payment made at or before the lease commencement date, less any incentives
received
▪ Any initial direct costs incurred
– Only incremental costs qualify as initial direct costs subject to capitalization
– These costs are those that the entity would not have incurred if the lease had not been entered into (i.e.
commissions)
– Legal costs are not considered initial direct costs because they would be incurred regardless of whether
a lease is ultimately obtained
▪ ROU = Lease Liability + Initial direct costs – lease incentives + prepayments
Right Of Use Asset

12. ▪ Extension periods that have a reasonable chance of being executed should be included
▪ Lease modifications to be assessed-may be a new lease or remeasure existing lease and reassess
classification
▪ Lease and non-lease components to be segregated (CAM, taxes and insurance). Leases to be
revised to break these out of the fixed lease payment if they are included, or may be capitalized
▪ Lessor accounting relatively unchanged
▪ Related Party Leases-Many related party leases do not have contractual terms or there is no
agreement in place
▪ Leases will potentially need to be written or modified
▪ Potential issue-leasehold improvements on related party leases have been capitalized for
extended lengths of time; if a lease is month-to-month it is difficult to capitalize leasehold
improvements for 20 years!
Items to Note

13. 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
Operating lease straight line annual payment is $300,000
There are no variable lease payments
Example Facts

14. Using the example facts
Finance Lease Example
Year Right-of-Use Asset Lease Liability
Beginning
Balance Amortization
Ending
Balance
Beginning
Balance
Interest @
5% Payments
Ending
Balance
1 808,120 269,373 538,747 808,120 40,406 200,000 648,526
2 538,747 269,373 269,373 648,526 32,426 300,000 380,952
3 269,373 269,373 - 380,952 19,048 400,000 -

15. Finance Lease Example - Summary
Year 1 Year 2 Year 3 Total
Interest 40,406 32,426 19,048 91,880
Amortization 269,373 269,373 269,373 808,120
Total Expense 309,779 301,800 288,421 900,000
Year 1 Year 2 Year 3 Total
Operating Cash
Flow
40,406 32,426 19,048 91,880
Financing Cash
Flow
159,594 267,574 380,952 808,120
Total Cash Flow 200,000 300,000 400,000 900,000

16. Operating Lease Example
Year Right-of-Use Asset Lease Liability
Beginning
Balance
Straight-line
Expense Interest Amortization
Ending
Balance
Beginning
Balance
Interest @
5% Payments
Ending
Balance
1 808,120 300,000 40,406 259,594 548,526 808,120 40,406 200,000 648,526
2 548,526 300,000 32,426 267,574 280,952 648,526 32,426 300,000 380,952
3 280,952 300,000 19,048 280,952 - 380,952 19,048 400,000 -
Expense Classified as A Single Line Item
• Above illustration depicts calculations necessary for subsequent measurement of the ROU asset and lease liability
• Interest and amortization components above are presented as a single operating expense similar to existing GAAP

17. Operating Lease Example - Summary
Year 1 Year 2 Year 3 Total
Interest 40,406 32,426 19,048 91,880
Amortization 259,594 267,574 280,952 808,120
Total Expense 300,000 300,000 300,000 900,000
Year 1 Year 2 Year 3 Total
Operating Cash
Flow
200,000 300,000 400,000 900,000
Financing Cash
Flow
- - - -
Total Cash Flow 200,000 300,000 400,000 900,000

18. Operating Lease Example –
Sample Journal Entry
Account Debit Credit
Cash 200,000
Rent expense 300,000
Right-of-use asset 259,594
Lease liability 159,594

19. Balance Sheet –
Assuming Operating Lease

20. Debt to Equity and
Current Ratios
ASSETS
Current Assets
Cash $ 10,000 Debt to Equity BEFORE
Accounts receivable 80,000 Outstanding Commitments 1,070,000
Inventory 2,000,000 Equity 1,500,000
Prepaid expenses 20,000 Debt to Equity Ratio 0.70
Total current assets 2,110,000
Property and Equipment, Net 1,000,000 Debt to Equity AFTER
Other Assets Outstanding Commitments 2,172,000
Right of Use Asset 1,102,000 Equity 1,500,000
Total other assets 1,102,000 Debt to Equity Ratio 1.40
Total Assets $ 4,212,000
CHANGE 0.70
LIABILITIES AND PARTNERS' CAPITAL
Current Liabilities
Current portion of long-term debt $ 70,000 Current Ratio BEFORE
Current portion of lease liability 200,000 Current Assets 2,110,000
Accounts payable 35,000 Current Liabilities 610,000
Advanced deposits 230,000 Current Ratio 3.46
Accrued expenses 275,000
Total current liabilities 810,000 Current Ratio AFTER
Long-Term Debt, Net 1,000,000 Current Assets 2,110,000
Lease Liability 902,000 Current Liabilities 810,000
Total liabilities 2,712,000 Current Ratio 2.60
Commitments and Contingencies
Partners' Capital 1,500,000 CHANGE (0.85)
Total Liabilities and Partners' Capital $ 4,212,000

21. ▪ Initial adoption-you can elect to use the package of practical expedients which includes:
▪ No reassessment of lease classification (operational or capital)
▪ No re-evaluation of whether a lease continues to be a lease
▪ No reassessment of initial direct costs-if they met under 840 and continue to meet under 842
▪ Combining (not separating) lease and non-lease components within contracts
▪ Use of risk-free rate as incremental borrowing rate
▪ Short term lease recognition exemption (exclude 12 months or less at lease inception)
▪ Use of hindsight
Practical Expedients

22. Disclosure Requirements –
Highlights of What’s New
QUALITATIVE QUANTITATIVE
• Significant assumptions and judgments
- Determination of whether a contract contains a lease
- Allocation between lease components
- Determination of discount rate
• For Finance leases, amortization of right-of-use (ROU) assets &
interest on lease liabilities (including capitalized interest)*
• Policy election to not recognize short-term leases • Operating lease expense (including capitalized costs)*
• Policy election to bundle lease components for allocation purposes • Short-term lease expense, when term > 30 days*
* 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.
• 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 & 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 & Operating
leases
• Weighted-average remaining lease term, presented separately by
Finance and Operating leases
• Weighted-average discount rate for Finance and Operating leases as
of the balance sheet date

23. Sale Leaseback Transactions –
Some Good News!
OLD LEASE STANDARD (ASC 840) NEW LEASE STANDARD (ASC 842)
Best case scenario: Some or all of the gain on the sales component of the
transaction is deferred
Recognize full gain on sale in year sold
Worst case scenario: Fails sale-leaseback treatment, accounted for as a
financing agreement
Must meet the follow criteria
• Control of the leaseback property transfers to buyer under ASC 606
• Leaseback is an operating lease to the lessee
• No repurchase option in most cases

24. ▪ Inventory your leases
▪ Consider embedded leases in other contracts
▪ Review vendor payments with service agreements
▪ Determine key metrics of the leases identified
▪ Incremental borrowing rate
▪ Lease term
▪ Bundling of lease and non-lease components
Next Steps

25. ▪ Quantify the impact on your Company’s financial statements
▪ Potential covenant impacts
▪ Practical application of the standard
▪ Infrastructure needed to support
▪ Assess the most appropriate tools to use for the accounting
▪ Excel tool
▪ Third party software recommendations
▪ Facilitate conversation with financial statement users
▪ Lenders, vendors, insurance companies, etc.
How We Can Help

26. Questions?

27. Thank You
For Watching & Listening