CFO Consulting Partners

Experience, focus and integrity. CFO Consulting Partners improves shareholder value.

Featured News

Curated Articles: Blockchain in Finance, Supply Chain and Accounting

By

As new technologies are constantly emerging, it is crucial for firms to be able to adapt to the new technologies to not risk trailing behind their competitors. Currently for many accounting,  finance, and supply chain functions, that new technology is blockchain. Blockchain can be described as a data structure that holds transactional records and while ensuring security, transparency, and decentralization. You can also think of it as a chain or records.
Below are published articles related to the use of blockchain:
  • In the Fortune article titled “How Blockchain Will Shake Up the Financial World: 5 Questions for Author Alex Tapscott,” Jeff John Roberts interviews Alex Tapscott about some of the impacts of blockchain technology. Alex Tapscott is a best selling author who is most famous for his book Blockchain Revolution. Alex Tapscott discusses the three main pillars of our modern society who are deeply invested in blockchain; the civil society, governments, and private industry.

 

  • In an article published by Wharton Business school, titled “How Blockchain Will Redefine Supply Chain Management,” Stefan Gstettner is interviewed about the impact of blockchain on supply chain. Stefan Gstetner is a partner and associate director at Boston Consulting Group and he expects blockchain to have the greatest impact on dispersed networks with many participants.

 

CFO Consulting Partners does not endorse any particular publication, direct or indirect. We do assist companies in evaluating its financial management needs and in recommending a best fit. Please feel free to reach out to Allan Tepper, Senior Managing Director, at (646) 650-2028 x701, or by email at atepper@cfoconsultingpartners.com

 

By Peyton Wille, CFO Consulting Partners

Curated Articles: Hitting the Wall

By

As companies grow, at some point many will “hit a wall.” It is likely, based on prior studies, that the if and when this may occur will not have been predicted by company management.
Below are published articles related to companies hitting the wall:
  • Eric M. Ross published an article, titled “Hitting the Wall,” in which he mapped out the typical timeline for companies as they grow and expand. In order for companies to remain profitable and have continued growth in sales after they’ve hit the wall, Ross explains the key areas of focus, which are:
    • Management approach
    • Organization, processes, and systems
    • Working capital availability
  • The most suitable person to understand how to predict when a company will hit its wall would be someone who has been there before. In an article from Inc. Magazine, also titled “Hitting the Wall,” the founder James Bildner of J. Bildner & Sons explains what indicators to look for before a company hits the wall. He stresses that the main theme for all companies that reach this point of stagnation is the same, poor cash flows.
  • In Mike Rogers article, “How to Avoid Hitting the Growth Wall,” he dives into the management techniques that can be detrimental for companies as they grow. He lists the five management practices that he feels stalls growth:
    • Treadmill Mentality
    • Management by Insanity
    • Rear-View Mirror Management
    • Management by ESP
    • Midas-Touch Management

Newsletter – October 2019

By

Insurance Update – Includes our Takeaways from the Annual SIFM Conference

We attended the Annual Conference of the Society of Insurance Financial Management held in Atlantic City, New Jersey, on September 15-18, 2019.  This excellent and well-attended Conference brought together finance professionals from insurance companies and professional service providers to discuss topics of current interest.  This update incorporates a few of the themes introduced by speakers at the Conference.
Overall:
Financial leaders in insurance will continue to be challenged by our rapidly changing industry and the real need to more quickly deliver meaningful financial information.  Many financial executives are wrestling with support of innovative new products, how to best leverage new technology, accounting and tax changes, and the need to maintain a quality high workforce.
Meeting Evolving Customer Needs:
 
The needs of the industry’s customers continue to change, and finance teams need to be able to support their business partners in meeting those needs.  This will require speed, agility and affordable cost.  One potential enabler is automation, but the base finance and accounting processes themselves need to be evaluated to make sure they are optimized for existing technology and to avoid “paving the cow path” when new technology is implemented.
Where there is a lack of comfort with a source of management and financial information, for any reason, multiple sources tend to proliferate, which creates a need for a single source of the truth.  Until that single source is achieved, the multiple sources need to be reconciled each and every reporting cycle. That effort, which can be considerable, should achieve the obvious control objectives as well as underscore the need to eliminate the multiple sources.
Implementing New GAAP for Credit Losses:
This new accounting standard has more applicability to insurers than some may realize.  First, an outline of the effective dates for calendar year-end entities, incorporating the FASB’s tentative decision in October to defer certain dates:
      1. Public business entities that meet the definition of an SEC filer, excluding “smaller reporting companies” (as defined by the SEC) – January 2020
      2. All other entities – January 2023
Most insurers will expect the new GAAP (ASU 2016-13) to apply to held to maturity investments and commercial mortgage loans, BUT it also applies to reinsurance receivables!  The new GAAP model, Current Expected Credit Losses (CECL), requires reserving expected future losses at the time the asset is initially recorded (there is no “probable” trigger anymore).
Reinsurance receivables therefore are required to be viewed as having a probability of default, which requires estimating both that probability and the amount of loss that would occur in the event of a default.  There are several practical considerations to keep in mind in making these estimates:
  • For probability of default, where the insurer has no history of having experienced defaults in its reinsurance arrangements, it may be necessary to use industry statistics;
  • For amount of loss in the event of default, the required reserve may not be very sensitive to this estimate if the probability of loss is low.
For statutory accounting purposes, the rules on credit losses have not changed yet, but we can reasonably expect those rules to follow suit after the GAAP world has developed some experience applying the new standard.
Tips for Insurance Company CFO’s & CEO’s:
 
Merger & Acquisition-
  • As brokers perform due diligence on acquisition opportunities, client agreements should be reviewed to ensure that these agreements allow for transfer of the contract to the acquiring company.  Otherwise the acquiring company could experience more rapid client attrition than anticipated.
  • With the reduction in tax rates, as companies model acquisition opportunities, companies should be sure to incorporate these lower rates in the net operating loss forward calculations
Supplemental Compensation-
  • Brokers need to thoroughly understand the terms of their Carriers’ Supplemental Compensation Agreements. A worthwhile exercise is to read each agreement and recompute the amount that should have been received for each of the last few prior payment periods.  Then compare these calculations to the computations provided by the Carrier.
Product and Business Unit Performance-
  • Some companies are using expedient methodologies to allocate corporate overhead across business units or products – i.e., the allocation of overhead as a percent of revenue.  In other cases, when business drivers are utilized to allocate these costs, expenditures needed to support the rapid future growth of one product are inappropriately distributed across all products.  This occurs because current period business drivers are used to compute the current period cost allocations.  As a result of these two allocation approaches, Product and Business Unit internal reports could be inaccurate.
  • Business intelligence tools and complex spreadsheets are often used to provide additional analysis.  Financial information on these additional profit segments is used to make key decisions for business in a particular geography, industry, sub-product, or marketing channel. Control and review processes must be established in order to prevent the same revenue from being counted twice or partial capturing of certain costs.
The Insurance Industry team at CFO Consulting Partners are senior level professionals with CFO, Controller and Rating Agency experience.  We have helped Carriers and Brokers manage credit ratings, implement strategic planning and business analysis functions, improve financial reporting and accounting processes, and strengthen internal controls.
by Michael Sheahan, Director, CFO Consulting Partners
and Paul Karr, Director, CFO Consulting Partners

Biweekly Newsletter – Technology Transformation

By

Streamlining financial control and reporting is crucial for a company’s success and ability to drive change. How robust is your accounting system?

Below are recently published articles related to ERP Software:

  • Does your company need an ERP system? Glenn Tyndall in “The Real Cost of an Enterprise Resource Planning System” defines an ERP system as “a suite of software packages that can perform accounting, product planning and development, manufacturing, inventory management, sales management, human resources, and other business tasks,” and dives into costs of the system including:
    • Implementation
    • Training
    • Development for Customization
    • Process Redesign
    • Maintenance
    • Upgrades
    • Support
  • Eric Kimberling in “What are the Top ERP Systems for 2019” analyzes the best accounting systems for small to mid-sized companies taking into account “market share; ease of implementation; maturity, flexibility, and scalability of solutions; ease of integration to third-party systems; ease of organizational change management and training; strength of vendor ecosystem; and average time to benefits realization” to rank the best ERP Systems.
  • Lori Fairbanks in “Best Accounting Software and Invoice Generators of 2019” evaluates affordable, easy-to-use accounting programs designed for startup and small companies summarizing pros and cons for over 30 different systems.

CFO Consulting Partners does not endorse any particular accounting system nor does our firm have any connection, direct or indirect with any particular software developer or value-added reseller. We do assist companies in evaluating its financial management needs and in recommending a best fit. Please feel free to reach out to Allan Tepper, Senior Managing Director, at (646) 650-2028 x701, or by email at atepper@cfoconsultingpartners.com.

By Zach Gould, CFO Consulting Partners

Biweekly Newsletter – Fintech in 2019

By

Following the trend of our latest newsletter, AI and Machine Learning, this newsletter will focus on the growth of FinTech in 2019.

Deloitte defines financial technology (“FinTech”) as “digital innovation in the financial sector. At its inception, the understanding of FinTech was limited to innovative ways of facilitating payments and transactions. Underpinned by revolutionary shifts in internet and mobile technology in recent years, the realm of FinTech has witnessed explosive growth. Nowadays, it refers to a wide variety of technological interventions within the financial services arena, such as crowdfunding, online customer acquisition, mobile wallets, P2P lending, MPOS (mobile point of sale), MSME (micro, small, and medium enterprise) services, personal financial management, private financial planning, Blockchain and cryptocurrencies. FinTech is also used to describe businesses that aim to provide financial services by making use of software and modern technology.”

Below are recently published articles related to FinTech:

 

By Zach Gould, CFO Consulting Partners

Biweekly Newsletter – Machine Learning and Artificial Intelligence

By

Machine learning has the potential to disrupt every industry. A computer’s ability to iterate through data and solve complex mathematical calculations is developing rapidly with improved processing speeds and data storage.

SAS Insights defines machine learning as “a method of data analysis that automates analytical model building. It is a branch of artificial intelligence based on the idea that systems can learn from data, identify patterns, and make decisions with minimal human intervention.”

“Humans can typically create one or two good [financial] models a week; machine learning can create thousands of models a week”

-Thomas H. Davenport, an excerpt from The Wall Street Journal

Below are recently published articles surrounding the world of AI:

  • How are top-performing companies in all industries using AI in marketing to improve their brand image and revenue? Louis Columbus’s article, “10 Charts That Will Change Your Perspective of AI in Marketing” include staggering statistics on how AI “enables marketers to understand sales cycles better, correlating their strategies and spending to sales results.”
  • How does one value the most critical asset of modern business, information? In Virginia Collins and Joel Lanz’s article titled “Managing Data as an Asset,” Collins and Lanz explain how “treating data as an asset can enhance its value, facilitate organizational activities, and achieve strategic goals.”
  • In Steve Lohr’s article, “How Do You Govern Machines That Can Learn? Policymakers Are Trying to Figure That Out,” Lohr analyzes brainstormed legislation by The Organization for Economic Cooperation and Development, whose policy focused on AI, attempts to “foster responsible economic development, balancing innovation and social protections.”

By Zach Gould, CFO Consulting Partners

Newsletter – June 2019

By

Qualified Opportunity Zones – an Executive Summary

Mark Sloan, Director, CFO Consulting Partners

There has been much discussion regarding Qualified Opportunity Zones (“QOZ”), the tax benefits of investing in a QOZ and how it should fit into a strategy of minimizing taxes on long term capital gains. This newsletter will provide an overview as to the rules governing QOZ and some practical considerations regarding investing in QOZ.

BACKGROUND:

As a result of the Tax Cut and Jobs Act (“TCJA”) passed in late 2017, a taxpayer may elect to recognize certain tax deferrals and exclusions on the gain realized from the sale or exchange of property to an unrelated party if the gain is reinvested in a qualified opportunity zone fund within 180 days from the date of the sale or exchange and the gain remains invested for a defined period of time.

Opportunity zones are eligible low-income census tracts that had either poverty rates of at least 20 percent or median family incomes no greater than 80 percent of their surrounding area’s, according to the U.S. Census Bureau’s 2011-2015 American Community Survey. Such tracts have been nominated by governors and certified by the U.S. Department of Treasury for designation as an Opportunity Zone. There are over 8,700 such tracts located throughout the United States.

A qualified opportunity fund (“QOF”) is the vehicle to which gains must be invested in order to qualify for the tax benefits of the program. In order to achieve the tax benefits, the taxpayer must invest in a QOF and not directly into qualified opportunity zone property. A QOF is a corporation or partnership organized with the specific purpose of investing in opportunity zone assets. The entity must invest at least 90% of its assets in qualified opportunity zone property.

Qualified opportunity zone property can be in the form of direct ownership of business property, or into opportunity zone portfolio companies through either stock ownership or partnership interest. Certain businesses are precluded for consideration as property to be held by opportunity zone portfolio companies and these include golf courses, country clubs, massage parlors, tanning salons, hot tub facilities, racetracks, casinos or any other gambling establishment and liquor stores. These limitations do not apply when a QOF is investing into the Qualified Opportunity Zone directly.

Upon the investment of qualified gains, the basis in the capital gains will be zero. The gain will then be recognized into income on the earliest of the disposition of the opportunity zone property or December 31, 2026. If the QOF is held five years, then the taxpayer’s basis is increased by 10% of the original gain and then it is increased another 5% if held for another two years. If the QOF is held at least ten years, then all gains attributable to the appreciation on the original gain will be excluded from income.

BENEFITS:
There are numerous tax benefits attributable to the timely investment of capital gains into a QOF.

  • Deferral of tax on invested capital gains until December 31, 2026, at the latest;
  • Permanent exclusion of tax on capital gains of up to 15% if held for seven years, and;
  • Permanent exclusion of tax on any subsequent appreciation on the invested capital gains if held for more than ten years.

OTHER CONSIDERATIONS:

There are other advantages to investing in a QOF that make it a more flexible option to Section 1031 as a means to shelter capital gains:

  • As opposed to Section 1031, which requires the investment of the full proceeds in order to qualify for temporary tax deferral on gains, only the gain portion of the proceeds needs to be invested, freeing up cash at the time of the original sale of capital assets.
  • Investment in a QOF can provide permanent exclusion of tax on a portion of capital gains; Section 1031 transactions will only provide for deferral of tax on capital gains.
  • As opposed to Section 1031, which requires the investment of proceeds into like kind assets, the only requirement for a QOF is that the gains are invested into opportunity zone assets. For example, if a work of art is sold at a gain, then the gain can be invested in a different class of asset such as real estate.
  • It should be noted that as a result of the TCJA, the use of Section 1031 is now limited to real estate assets and no longer other types of capital assets.

While there are significant benefits to investing in opportunity zone funds, there are certain caveats that need to be considered:

  • If the investment has not been disposed of sooner, the invested gain will be recognized in income at December 31, 2026. This means that the taxpayer will need to provide liquidity for this event while the gain is still locked up in the investment.
  • To achieve the 15% permanent exclusion on the original gain, there must be a rollover of the gain no later than December 31, 2019 in order to achieve the 7 year holding period for this exclusion.
  • To maximize the tax benefits attributable to this program, the strategy is to lock up the invested gains for a period of ten years. This could result in a lower IRR over the life of the project.
  • Although the census data used to designate tracts as opportunity zones is dated and there may be some areas that have gone through improvement, there can still be a higher risk attributable to investing in areas that are opportunity zones.
  • An investor may not contribute appreciated property directly into the QOF. Such property must be first sold (and begin the clock running for the recognition of a portion of the gain) and the amount attributable to the gain invested into the fund.
  • The regulations impose limitations on the amount of cash and intangible assets that can be held at any time by an opportunity zone fund. This limitation can be mitigated through a structure where the QOF invests into an opportunity zone portfolio company (either through stock ownership or partnership interest). Under this structure, the portfolio company can hold intangible assets that are used in an active trade or business and cash in an amount for reasonable working capital needs.
  • The investment in opportunity zone funds should be evaluated on the overall economics of the fund and its strategy, and there should not be disproportional weight given to the tax deferral/exclusion feature of the program as the basis for investing in the opportunity zone.

This newsletter is meant as a broad overview on Qualified Opportunity Zones. There are many other details concerning the structure of funds, limitations on the type of assets that can be held by a QOF, determination of original use and subsequent improvements, etc. CFO Consulting Partners has been following developments in this area and we stand ready to provide you with guidance in navigating through this new and challenging area. In addition to helping you understand the details and advising you if this program can fit into your investment strategy, we also have relationships with various sponsors and service providers who can offer you opportunities with various funds that they have established. We also have relationships with law firms who can evaluate that the funds are structured in accordance with Treasury regulations.

CFO Consulting Partners is a proud sponsor of the Exit Planning Exchange (XPX). XPX is a multi-disciplinary community of professional advisors who work collaboratively to help owners build a valuable business and assist them in preparing and executing a successful transition.

CFO Consulting Partners XPX Advisors:

Oliver Brooks

Steven Crowley

David DeMuth

John Kovacs

Mark Sloan

Allan Tepper

Joseph VonEhr

Biweekly Newsletter – Executive Compensation Decisions

By

When a board of directors is determining the compensation for a company’s CEO and other top level executives, there are many factors that must be examined before enacting a specific compensation plan.

Below are multiple articles related to executive compensation decisions:

-One important thing to consider when evaluating any investment opportunity is executive compensation. An executive who is not compensated properly may not have the correct incentive to preform with the best interests of the shareholders. Justin Kuepper explains how to evaluate executive compensation in his article, titled “Evaluating Executive Compensation.”

-In Carmen Nobel’s article, titled “Who Really Determines CEO Salary Packages?” Nobel touches on why, although every CEO and company are very different, executive compensation packets generally look very similar. Two reasons for this are that many directors belong to boards at multiple firms and the second is compensation consultation commonality.

-Some people feel that CEOs are actually being compensated far too highly, including Steven Clifford in his article, titled “How Companies Actually Decide What to Pay CEOs.” In this article, Clifford argues that a luxury tax on any company that pays an executive over six million would be a solution to the over payment of executives.

By Peyton Wille, CFO Consulting Partners

Biweekly Newsletter- Importance of Cash Flow Management

By

For any company that is new or in the process of growing in size, cash management is a very important aspect of the business. Cash management is classified by Inc.com, as a broad term that refers to the collection, concentration, and disbursement of cash.

Below are multiple articles related to the importance of cash management:

-For middle-market businesses, cash flow can be even more important than sales and profits, since if the company’s cash flow suffers, the sales and profits won’t matter and the business could fall into failure or bankruptcy. Cadence Bank explains seven ways to prevent this in their article, titled “7 Ways to Strengthen Cash Flow in a Middle-Market Company.”

-Richard Passov wrote an article for the Harvard Business Journal about cash flow titled, “How Much Cash Does Your Company Need?” His article provides a model for how companies should go about determining their optimal capital structure.

-In a great article by Rebecca Macdonald and Nathan Zhu, titled “The Importance of Cash Flow Management,” Macdonald and Zhu ask an important question to business owners, “How well do you know when and where your cash is coming from or going to?” One of the most interesting facts from this article was that only slightly over 50% of small businesses even have positive cash flows.

By Peyton Wille, CFO Consulting Partners

Newsletter – February 2019

By

Implementation of the New Lease Standards by Lessors Under the ASC 842 (Part 2)

Mark Sloan, Director, CFO Consulting Partners

In our newsletter for January 2018, we discussed the new guidelines under ASC Section 842 regarding the recognition and financial reporting of leases. In that newsletter, the focus was primarily on the lessee, as there are significant changes affecting lessees, e.g., the recognition of a right of use asset and a corresponding liability on the balance sheet, and the concept of embedded leased assets within service agreements, to name a few. In this newsletter, the focus will be on the impact of this standard on lessors. 

In addition, during the year, there were updates to ASC 842 providing clarification to the intended application of certain aspects of the standard, correct cross-reference inconsistencies, and provide entities with an additional optional transition method. This newsletter will focus on the additional optional transition method that is available for all entities. 

EFFECTIVE DATE OF IMPLEMENTATION:

ASC 842 is effective for public firms, certain not-for-profits and certain employee benefit plans in years beginning after December 15, 2018 (including interim periods) and for all other entities in years beginning after December 15, 2019 and interim periods within fiscal years beginning after December 15, 2020. Earlier application is permitted for all entities.

TYPES OF LEASES UNDER ASC 842:

Under ASC 842, there are three types of leases that a lessor will record:

  • Sales-type
  • Direct financing
  • Operating

A fourth type lease which was allowed under previous GAAP, leveraged lease, has been eliminated under the new ASC. 

A lessor will use the same lease classification criteria used by a lessee to determine the type of lease to be recorded. The five criteria are as follows: 

1)      Ownership is transferred at the end of the lease;

2)      A bargain purchase option exists;

3)      The lease term approximates the remaining economic life of the asset (assuming the lease term does not commence toward the end of the life of the asset);

4)      The present value of the lease payments and any residual value guarantees equal or exceed the fair value of the asset, and;

5)      The leased asset has no alternative use to the lessor at the end of the lease. If any of the above criteria is met, the lease will be determined to be a sales-type lease.  Assuming the collectability of the lease payments is probable, the lessor will then, on commencement date of the lease, derecognize the carrying value of the underlying asset, and recognize the following: 

a)       A net investment in the lease, comprised of:   

1)      The present value of the lease payments to be received and the guaranteed residual value (both discounted using the rate implicit in the lease), and;

2)      The unguaranteed residual asset, i.e., the present value of the amount the lessor is expected to derive from the underlying asset not guaranteed by the lessee, discounted using the rate implicit in the lease.

b)      Any selling profit or loss arising from the transaction, and;

c)       As an expense, any initial direct costs.

After the commencement date of the lease, the lessor will recognize the following:

a)       Interest income on the net investment in the lease;

b)      Variable lease payments which are not included in the initial net investment as either profit or loss in the period where the changes in facts and circumstance on which the variable lease payments are based occur, and;

c)       Impairment of the net investment if such impairment is determined to arise.

If the collection of the lease payments is not probable, then the lessor would continue to reflect the underlying asset on its books, record depreciation expense on such asset and treat the lease payments as unearned income. Such accounting will continue until the collection of the rent payments is deemed probable, the contract has been terminated or the lessor has repossessed the asset. Upon the determination that the collection of the lease payments is probable, the unearned income would be reversed, the carrying value of the asset would be charged off to operations, and the present value of the remaining lease payments, the guaranteed residual value and the present value of the unguaranteed residual value would be recorded as a net investment.

If the transaction does not meet any of the above five criteria, the lease should be evaluated for the following two conditions:

1)      The present value of the sum of the lease payments and any residual value guaranteed by the lessee that is not already reflected in the lease payments and/or any other third party unrelated to the lessor equals or exceeds substantially all of the fair value of the underlying asset, and;

2)      It is probable that the lessor will collect the lease payments plus any amount necessary to satisfy a residual value guarantee. 

If the lease meets both the above criteria, it shall then be classified as a direct financing lease. The main difference between a sales-type lease and a direct financing lease is the presence of a guaranteed residual value provided by a third party. Also, as opposed to a sales-type lease where initial direct costs are expensed out at the commencement date, under a direct financing lease, such initial direct costs shall be capitalized using separate discount rate and included in the measurement of the net investment in the lease. Another difference between a sales-type lease and a direct financing lease is that in a direct financing lease, the selling profit is required to be deferred at the commencement date and included in the measurement of the net investment in the lease. Such profit will be recognized into income over the terms of the lease. Any loss arising from the transaction will be immediately recognized (similar to a sales-type lease). 

If a transaction is determined not to meet the criteria of a direct financing lease, it will then be recognized as an operating lease. As such, the lease payments are recognized in income over the straight line method (unless there is another systematic and rational basis that better represents the underlying transaction), variable lease payments are recognized as income in the period in which changes in facts and circumstances giving rise to the payments occur, and initial direct costs are reflected as an expense over the lease term on the same basis as lease income. The leased asset continues to be shown on the balance sheet of the lessor, with periodic charges to reflect the depreciation of the asset. Fundamentally, the accounting for an operating lease for a lessor remains consistent with the guidance found in the previous standard (ASC 840). 

OTHER CONSIDERATIONS:

If a lease agreement is replaced by a new agreement with a new lessee, the lessor shall account for the termination of the original lease and shall account for the new lease as a separate transaction. 

Also, under ASC 842 and consistent with the treatment required of lessees, lessors are required to allocate consideration in a contract into separate lease and non-lease components. Using the guidance on variable consideration under ASC 606 Revenue Recognition, this would relate to the transfer of one or more goods or services that are not leases or an outcome from transferring one or more goods or services that are not leases. An example of a non-lease component would be payment by the lessee to the lessor for common area maintenance, utilities or cleaning services.   There is a practical expedient that a lessor can elect and that is, by class of underlying asset, not to separate non-lease components from the associated lease component and instead, to account for those components as a single component if the non-lease components would otherwise be accounted for under the new revenue guidance under ASC 606 and both the following are true:

1)      The timing an pattern of transfer of the non-lease components and lease components are the same, and;

2)      The lease component, if accounted for separately, would be accounted for as an operating lease.

If the non-lease component or components associated with the lease components are the predominant component of the combined components, then the entity is required to account for the combined component in accordance with ASC 606, Revenue Recognition. Otherwise, the entity must account for the combined component as an operating lease in accordance with ASC 842. 

There can be complex transactions involving sales and leaseback arrangements and the accounting for deferred taxes which are beyond the scope of this newsletter. This newsletter is intended to provide a very high level summary of the more pertinent areas of the new standard. 

TRANSITION METHODS:

In the financial statements in which an entity first applies the standard, the entity will apply the standard to all leases that exist at the beginning of the earliest comparative period presented. An entity shall adjust the equity at the beginning of the earliest comparative period presented and other comparative amounts disclosed for each prior period presented. 

A lessee may elect not to apply the standards to short-term leases, i.e. leases with a term less than twelve months. 

Practical expedients were provided in the initial ASC 842 standards. They must be elected as a package and applied consistently to all leases that commenced before the effective date of the standard: 

1)      An entity need not reassess whether any expired or existing contracts are or contain leases;

2)      An entity need not reassess the lease classification (i.e., operating or finance lease) for any expired or expiring leases, and;

3)      An entity need not reassess initial direct costs for any existing leases. 

Another practical expedient that is available is the entity may elect to use hindsight in determining the lease term (including purchase options) and in assessing impairment of the entity’s right-of-use asset. This practical expedient may be elected separately or in conjunction with practical expedients mentioned in the aforementioned paragraph. 

Accounting Standards Update 2018-11 provides entities (both lessees and lessors) with an additional optional transition method upon adoption. An entity may elect, in lieu of restating prior years financial statements for the implementation of ASC 842, to recognize a cumulative effect adjustment to the opening balance of retained earnings in the period of adoption. For an entity providing comparative financial statements, the statements for the periods prior to adoption would continue to reflect the standards under ASC 840, along with the footnote requirements under ASC 840 for such periods. 

Public firms will need to disclose the effect on the pronouncement in the footnotes for 2018 financial statements, assuming they do not elect early adoption. 

This summary, along with our newsletter of January 2018, is intended to provide an overview of the new pronouncement for lease accounting. This implementation is expected to have a deep impact on most entities and with the implementation date rapidly approaching, it is imperative that firms begin to understand the standard and assess the effect this pronouncement will have on their financial statements. For public firms, they will need to begin to reflect this new standard in their first quarterly financial statements for 2019. 

CFO Consulting Partners has an extensive understanding of the new standard, and assist companies in the evaluation and implementation of this standard.

We are a proud sponsor of XPX. XPX is a multi-disciplinary community of professional advisors who work collaboratively to help owners build valuable businesses and assist them in preparing and executing a successful transition. Learn more...

We are a proud member of FINACA. FINACA is a nationwide network of independent finance and accounting consulting firms focused on delivering exceptional client service. Learn more...

Subscribe to our Newsletter

Sign-Up Now

Privacy Policy