Ready or Not, Here Come the New Lease Accounting Standards

Ready or Not, Here Come the New Lease Accounting Standards JLL Michael Billing Managing Director Global Lease Accounting Lead sig.org/summit

Ready or not Here come the new lease accounting standards Michael Billing Managing Director Global Lease Accounting Lead

About JLL Professional services firm that specializes in real estate and investment management Helps real estate owners, occupiers and investors achieve their business ambitions Fortune 500 company Revenue of $6.8 billion and fee revenue of $5.8 billion On behalf of clients, manages 4.4 billion square feet and completed sales acquisitions and finance transactions of approximately $136 billion last year Nearly 300 corporate offices, operations in over 80 countries and a global workforce of more than 77,000 Our goal Our mission To be the first choice in corporate real estate services and outsourcing solutions Improve productivity Offer the best scalable solutions Deliver locally, regionally and globally Deliver by industry sector and service 2017 Jones Lang LaSalle IP, Inc. All rights reserved. 3

Today s discussion Lease accounting changes overview Impact on real estate and equipment leases Leasing strategies Implications for procurement How to prepare 2017 Jones Lang LaSalle IP, Inc. All rights reserved. 4

Poll Question How familiar are you with the lease accounting changes? What on earth are you talking about? I ve heard about the changes and know a little bit about them I know just enough to be dangerous I wrote the book on lease accounting 2017 Jones Lang LaSalle IP, Inc. All rights reserved. 5

Lease accounting changes Nearly all leases go on the balance sheet as Right of Use asset and Lease Liability Operating leases reflect lease expense on a straight-line basis (US GAAP only) Finance leases reflect a frontloaded expense pattern US GAAP ASU 842 & IFRS 16 All leases not subject to exemptions are treated as finance leases under IFRS 2017 Jones Lang LaSalle IP, Inc. All rights reserved. 6

Capitalization Include Fixed Payments (including In- Substance Fixed Payments) Less any Lease Incentives Variable Payments Based on Rate or Index Cost of Options & Penalties If Reasonably Certain to Exercise Initial Direct Costs* Exclude Performance/Usage Rents Non-Lease Components (e.g. Operating Expenses) Apply Discount Rate of the Lease or Incremental Borrowing Rate Present Value Right-of-Use Asset Lease Liability * Initial direct costs are included only in the determination of ROU Asset 2017 Jones Lang LaSalle IP, Inc. All rights reserved. 7

IFRS U.S. GAAP Timing 2017 Comparative Period 2018 Comparative Period 2019 Effective Date Modified Retrospective Approach Restate & One-Time Equity Adjustment Restate Apply New Standard Full Retrospective Approach Restate & One-Time Equity Adjustment Restate Apply New Standard Modified Retrospective Approach No Restatement Impact on Comparative Periods Disclosed in Footnotes Apply New Standard & One-Time Equity Adjustment 2017 Jones Lang LaSalle IP, Inc. All rights reserved. 8

Key decisions to be made Adoption Transition Technology When will the new standards be adopted and when do you want to be prepared? What transition expedients will be adopted? What technology will be used to facilitate the new requirements? Team Data Decisions Who will perform the lease accounting activities? Where will non-lease data come from? How should decisionmaking change? 2017 Jones Lang LaSalle IP, Inc. All rights reserved. 9

Equipment vs. real estate leases Real estate leases Management is often centralized Data is often housed in databases Single lease, single asset Assets are easily validated Equipment leases Management is often decentralized Data is often housed in spreadsheets, at best Single lease, multiple assets Assets are often difficult to validate 80% of U.S. companies lease some or all of their equipment 2017 Jones Lang LaSalle IP, Inc. All rights reserved. 10

Impact on decision-making Lease vs. buy strategy will change 11% Will seek shorter lease durations 17% 39% 50% No Unsure Yes 39% No Unsure Yes 44% Decision-making process will change Plan to seek more CRE leases excl. OpEx 17% 16% 28% 44% No Unsure No Unsure Yes Yes 28% 67% 2017 Jones Lang LaSalle IP, Inc. All rights reserved. 11

Optimizing the outcomes Treasury Corporate Real Estate Accounting and Tax Strategic Investments Operations Credit Rating Agencies & Stock Analysts Shareholders Stakeholders Decision Objectives Satisfy Business Unit Requirements Maintain Credit Quality Maintain Maximum Operating Control Maximize Shareholder Value Earnings Per Share Benefit Minimize Balance Sheet Impact Financial Alignment and Optimization (FAO ): A consistent, systematic, consensus based decision making process for evaluating real estate financing options in ways that are meaningful to senior management, shareholders, stock analysts and credit rating agencies. 2017 Jones Lang LaSalle IP, Inc. All rights reserved. 12

Lease vs. own factors Single vs. multi-tenant Security Ability to renovate Decision flexibility Capital redeployment Cost of capital P&L impact Continued investment Tax impact Balance sheet metrics Control Business Needs Financial Timing Ability to grow or contract Location drivers Technical specifications Rent exposure Exit strategy Future obsolescence Technology changes Risk External Factors Real estate market dynamics Capital markets Investor interest in asset type 2017 Jones Lang LaSalle IP, Inc. All rights reserved. 13

Sale & leasebacks 1 2 3 Determine whether a sale has occurred Same treatment as other leases Gains & losses recognized immediately ASC Topic 606 Existence of a Contract Control of the Asset ASC Topic 842 Lease Classification ASC Topic 606 Gain/Loss Recognition 2017 Jones Lang LaSalle IP, Inc. All rights reserved. 14

Build-to-suits Topic 842 eliminates current build-to-suit guidance; now lessee deemed owner when control is gained prior to the lease commencement Control as opposed to risk Lessee degree of control during construction period Control means ownership during construction period Deemed ownership subject sale-leaseback Lessee flexibility improved Control standard less restrictive than risk standard Derecognition at lease commencement less difficult Lessee has abundance of flexibility 2017 Jones Lang LaSalle IP, Inc. All rights reserved. 15

Poll Question Have you been involved in sourcing or RFP discussions about putting a lease accounting solution in place? Yes we re all over it We ve started the discussion but haven t initiated anything formal yet Not yet but it s on our radar 2017 Jones Lang LaSalle IP, Inc. All rights reserved. 16

People and process considerations Variance Reports Process Forecasting Data Prepare lease accounting variance reports for approval Run month-end lease accounting process Manage forecasting (quarterly and annual) requirements Collect data required for lease accounting and input into Lease Accounting Tool Measurement & Reassessment Perform initial measurement and reassessments activities Prepare & Validate Prepare and validate cash flow and lease accounting calculations Journal entries Entries & reporting Reporting Prepare journal entries and reporting for approval 2017 Jones Lang LaSalle IP, Inc. All rights reserved. 18

Technology selection considerations Integrate lease administration data into calculations Include configuration of costs & event types Permit both IFRS & US GAAP reporting for the same lease Allow for Operating vs. Finance lease classification Accommodation of real estate and equipment leases Permit input of incremental borrowing rates (IBR) rates Key lease accounting technology providers 2017 Jones Lang LaSalle IP, Inc. All rights reserved. 19

Technology selection considerations (cont d) Allow data tracking where options are reasonably certain to be exercised Permit re-assessment upon triggering events Include initial direct costs, incentives, penalty & purchase costs Provide detailed financial schedules at the lease level Include security roles to segregate lease administration & accounting user activity Allow export and upload of detailed journal entries to ERP system Key lease accounting technology providers 2017 Jones Lang LaSalle IP, Inc. All rights reserved. 20

Preparation plan Preparing for Day One Transition Ongoing Now 2017-2018 2019+ Project launch & action plan development Abstract additional lease data (as required) Collect non-lease data Conduct impact assessment Implement Lease Accounting Tool Review & refine financial models Evaluate & refine current processes Evaluate & refine strategic decision making Populate Lease Accounting Tool & Test Stakeholders Run & review Day One journal entries Evaluate & refine lease structures and tenures Develop and execute change management plan Real Estate Accounting IT Tax Treasury Investor Relations Business Unit 2017 Jones Lang LaSalle IP, Inc. All rights reserved. 21

Evaluation How-to: Why? Your feedback drives SIG Event content By signing and submitting your evaluation, you are automatically entered into a prize drawing How? Option 1: App 1. Select Schedule 2. Select Schedule by Day 3. Select Day 4. Select Session 5. Scroll to Description 6. Click on the Evaluation link Option 2: Browser 1. Go to www.sig.org/eval 2. Select Session (#WS02) COMPLETE & SUBMIT EVAL

Workshop #2 www.sig.org/eval Ready or Not, Here Come the New Lease Accounting Standards Speaker: Michael Billing Managing Director Global Lease Accounting Lead Michael.Billing@am.jll.com (312) 228 2638 Download the App: bit.ly/sigamelia Tweet: #SIGspring17