2016 Pork Management Conference
June 16, 2016
Clearwater, Florida
An Overview of the FASBs
New Leases Standards
Disclaimer
These slides are for educational purposes only.
The views expressed by the presenters are not necessarily
those of Frost, PLLC
Contact Information
T.J. Boyle
[email protected]
501-376-9241
OVERVIEW
Things to
Consider
Presentation
Lessor
Topics
Who is
affected
Effective Date
Examples
Components of a
Lease
Core
Principle
OVERVIEW
Adoption
Approach
Scope
Definition
WHO IS
AFFECTED
Effective
Date
Examples
Components of
a Lease
Core
Principle
Overview
Adoption
Approach
Scope
Definition
Applies To All Entities
Public
WHO IS
AFFECTED
Private
Not-forProfit
Who Is
Affected
EFFECTIVE
DATE
Examples
Components
of a Lease
Core
Principle
Overview
Adoption
Approach
Scope
Definition
Public Entities*
Beginning after December 15, 2018
2019 for calendar year end companies
EFFECTIVE
DATE
Non- Public Entities*
Beginning after December 15, 2019
2020 for calendar year end companies
*Early Adoption Permitted
Who is
affected
Effective
Date
Examples
Components
of a Lease
Overview
Adoption
Approach
CORE
PRINCIPLE
Scope
Definition
All Leases
(Except Short-Term)
CORE
PRINCIPLE
 Lease liability and
Lease asset (for right
to use)
 Will gross up both
sides of the balance
sheet
Assets
Liabilities
Who is
affected
Effective
Date
Examples
Components
of a Lease
Overview
Adoption
Approach
Core
Principle
SCOPE
Definition
SCOPE
Applies to all leases except:
Leases of:
Leases to Explore for or use of:
Inventory
Minerals
Assets Under Construction
Oil
Intangible Assets
Natural Gas
Biological Assets
(including timber)
Similar non-regenerative
resources (including
intangible right to explore and
use the land)
Who is
affected
Effective
Date
Examples
Components
of a Lease
Core
Principle
Overview
Adoption
Approach
Scope
DEFINITION
DEFINITION
A contract is a or contains a lease if it 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
 Right to obtain substantially all of the economic benefits
 Right to direct the use or the use is predetermined
 Customer has the right to direct how and for what purpose the asset is
used
 Predetermined
• Customer has the right to operate the asset without the supplier
having the right to change those instructions, or
• Customer designed the assets in a way that predetermines how and
for what purpose the assets will be used.
Who is
affected
Effective
Date
Examples
Components
of a Lease
Core
Principle
Overview
ADOPTION
APPROACH
Scope
Definition
Modified retrospective transition approach at
the beginning of the earliest comparative period
presented (existing and new contracts under the
new standard)
ADOPTION
APPROACH
Full retrospective approach
(existing, closed and new contracts)
Standard is applied as of the beginning of the
earliest comparative period presented
Who is
affected
Effective
Date
Examples
COMPONENTS
OF A LEASE
Core
Principle
Overview
Adoption
Approach
Scope
Definition
Components
Lease Term
COMPONENTS
OF A LEASE
Lease Criteria
Lease Classification
 Many contracts contain leases (lease
components) and agreements to
purchase or sell other goods and services
(non-lease component)
COMPONENTS
OF A LEASE
 Non-lease components are identified and
accounted for separately under other
applicable GAAP
 Lessees allocate consideration in the
contract to lease and non-lease
components, on a relative standalone
 Can make a policy election (by class) to
account for each lease component and
non-lease component as a single lease
component
Components
LEASE TERM
COMPONENTS
OF A LEASE
Lease Criteria
Lease Classification

Components of
a Lease

LEASE TERM

Includes any non-cancelable periods
 Reasonably certain is a high threshold for
including optional periods
• Options to extend or terminate a lease
Lease payments consistent with the lease term
 Exercise price of an option
• Only included if reasonably certain of
exercise.
 Payments for termination of lease
• Included unless reasonably certain not
to be exercised
Include fees paid by the lessee to the owners
of a special purpose entity for structuring the
transaction
Components
Lease Term
COMPONENTS
OF A LEASE
LEASE CRITERIA
Lease Classification
 The lease transfers ownership of the
asset at the end of the lease to the lessee
Components of
a Lease
 The lease grants the lessee an option to
purchase that the lessee is reasonable
certain to exercise
 The lease term is for the major part of the
remaining economic life of the asset
 The present value and residual value
guaranteed by the lessee equals to exceeds
substantially the fair value of the asset
LEASE CRITERIA
 The underlying asset is of such a
specialized nature that it is expected to
have no alternative use to the lessor at
the end of the lease
Components
Lease Term
COMPONENTS
OF A LEASE
Lease Criteria
LEASE CLASSIFICATION
 Lessees
Components of
a Lease
LEASE
CLASSIFICATION
 A lease that does not meet any of the
criteria is an operating lease
 A lease that meets any of the criteria is a
finance lease
 Short-term lease exemption
• Lease term of 12 months or less and no
purchase option
• Do not recognize lease asset or
liabilities
Who is
affected
Effective
Date
EXAMPLES
Components
of a Lease
Overview
Adoption
Approach
Core
Principle
Scope
Definition
 Customer enters into a contract with Supplier for the use of a
specified ship for a five-year period. The ship is explicitly specified
in the contract, and Supplier does not have substitution rights.
EXAMPLE 1
 Customer decides what cargo will be transported and whether,
when, and to which ports the ship will sail, throughout the five-year
period of use, subject to restrictions specified in the contract.
Those restrictions prevent Customer from sailing the ship into
waters at a high risk of piracy or carrying hazardous materials as
cargo.
 Supplier operates and maintains the ship and is responsible for the
safe passage of the cargo onboard the ship. Customer is
prohibited from hiring another operator for the ship or operating the
ship itself during the term of the contract.
 The contract contains a lease. Customer has the right to use the
ship for five years.
 There is an identified asset. The ship is explicitly specified in the
contract, and Supplier does not have the right to substitute that
specified ship
 Customer has the right to control the use of the ship throughout the
five-year period of use because:
 Customer has the right to obtain substantially all of the economic
benefits from use of the ship over the five-year period of use.
Customer has exclusive use of the ship throughout the period of
use.
EXAMPLE 1
(Cont.)
 Customer has the right to direct the use of the ship. The
contractual restrictions about where the ship can sail and the
cargo to be transported by the ship define the scope of
Customer’s right to use the ship. They are protective rights that
protect Supplier’s investment in the ship and
 Supplier’s personnel. Within the scope of its right of use, Customer
makes the relevant decisions about how and for what purpose the ship
is used throughout the five-year period of use because it decides
whether, where, and when the ship sails, as well as the cargo it will
transport. Customer has the right to change these decisions
throughout the five-year period of use.
 Although the operation and maintenance of the ship are essential to its
efficient use, Supplier’s decisions in this regard do not give it the right
to direct how and for what purpose the ship is used. Instead,
Supplier’s decisions are dependent on Customer’s decisions about
how and for what purpose the ship is used.
 Customer enters into a contract with an aircraft owner (Supplier) for the use
of an explicitly specified aircraft for a two-year period. The contract details
the interior and exterior specifications for the aircraft.
EXAMPLE 2
 There are contractual and legal restrictions in the contract on where the
aircraft can fly. Subject to those restrictions, Customer determines where
and when the aircraft will fly and which passengers and cargo will be
transported on the aircraft.
 Supplier is responsible for operating the aircraft, using its own crew.
Customer is prohibited from hiring another operator for the aircraft or
operating the aircraft itself during the term of the contract.
 Supplier is permitted to substitute the aircraft at any time during the twoyear period and must substitute the aircraft if it is not working. Any
substitute aircraft must meet the interior and exterior specifications in the
contract. There are significant costs involved in outfitting an aircraft in
Supplier’s fleet to meet Customer’s specifications.
 The contract contains a lease. Customer has the right to use the aircraft
for two years.
EXAMPLE 2
(Cont.)
 There is an identified asset. The aircraft is explicitly specified in the contract, and
although Supplier can substitute the aircraft, its substitution right is not substantive.
Supplier’s substitution right is not substantive because of the significant costs
involved in outfitting another aircraft to meet the specifications required by the
contract such that Supplier is not expected to benefit economically from
substituting the aircraft.
 Customer has the right to control the use of the aircraft throughout the two-year
period of use because:
 Customer has the right to obtain substantially all of the economic benefits
from use of the aircraft over the two-year period of use. Customer has
exclusive use of the aircraft throughout the period of use.
 Customer has the right to direct the use of the aircraft. The restrictions on
where the aircraft can fly define the scope of Customer’s right to use the
aircraft. Within the scope of its right of use, Customer makes the relevant
decisions about how and for what purpose the aircraft is used throughout the
two-year period of use because it decides whether, where, and when the
aircraft travels as well as the passengers and cargo it will transport.
 Customer has the right to change these decisions throughout the two year period
of use.
 Although the operation of the aircraft is essential to its efficient use, Supplier’s
decisions in this regard do not give it the right to direct how and for what purpose
the aircraft is used. Consequently, Supplier does not control the use of the aircraft
during the period of use, and Supplier’s decisions do not affect customer’s control
of the use of the aircraft.
 Customer enters into a contract with a manufacturer (Supplier) to purchase a
particular type, quality, and quantity of shirts for a three-year period. The
type, quality, and quantity of shirts are specified in the contract.
 Supplier has only one factory that can meet the needs of Customer. Supplier is
unable to supply the shirts from another factory or source the shirts from a
third-party supplier. The capacity of the factory exceeds the output for which
Customer has contracted (that is, Customer has not contracted for
substantially all of the capacity of the factory).
EXAMPLE 3
 Supplier makes all decisions about the operations of the factory, including the
production level at which to run the factory and which customer contracts to
fulfill with the output of the factory that is not used to fulfill Customer’s
contract.
 The contract does not contain a lease.
 The factory is an identified asset. The factory is implicitly specified because
Supplier can fulfill the contract only through the use of this asset.
 However, Customer does not control the use of the factory because it does not
have the right to obtain substantially all of the economic benefits from use of
the factory. This is because Supplier could decide to use the factory to fulfill
other customer contracts during the period of use.
EXAMPLE 3
(Cont.)
 Customer also does not control the use of the factory
because it does not have the right to direct the use of the
factory. Customer does not have the right to direct how and
for what purpose the factory is used during the three year
period of use. Customer’s rights are limited to specifying
output from the factory in the contract with Supplier.
Customer has the same rights regarding the use of the
factory as other customers purchasing shirts from the factory.
Supplier has the right to direct the use of the factory because
Supplier can decide how and for what purpose the factory is
used (that is, Supplier has the right to decide the production
level at which to run the factory and which customer contracts
to fulfill with the output produced).
 Either the fact that Customer does not have the right to
obtain substantially all of the economic benefits from use of
the factory or the fact that Customer does not have the right
to direct the use of the factory would be sufficient in isolation
to conclude that Customer does not control the use of the
factory.
Overview
Things to
Consider
PRESENTATION
Lessor
Topics
Balance
Sheet
PRESENTATION
Disclosure
Income
Statement
BALANCE
SHEET
Presentation
Disclosure
Income
Statement
BALANCE
SHEET
Assets
Liabilities
 Lease ROU asset can be
presented separately or
together with other assets
 Lease liabilities can be
presented separately
or together with other
liabilities
 Finance leases ROU
assets are prohibited from
being presented in the
same line as an operating
lease ROU asset
 Finance lease liabilities
are prohibited from
being presented in the
same line as operating
leases
Balance
Sheet
Presentation
Disclosure
INCOME
STATEMENT
Income Statement
 Finance Lease
INCOME
STATEMENT
 Lease-related interest expense
and amortization presented in a
manner consistent with how the
entity presents interest expense
and depreciation or amortization
of similar assets
 Operating Lease
 Lease expense included in
income from continuing
operations
Balance Sheet
Presentation
DISCLOSURE
Income Statement
Disclosure
DISCLOSURE
 New disclosures for lessees and lessors:
 Significant assumptions and judgments
 Maturity analysis
 Lessees
 Quantitative disclosure of lease expense by type
 Weighted average remaining lease term, by type
 Weighted average discount rate, by type
 Lessors
 Information about management of risks of residual
values
 Sales-type and direct financing, explanations of
significant changes in balances of unguaranteed
residual assets
 Table of lease income recognized during reporting
period
Overview
Things to
Consider
Presentation
LESSOR
TOPICS
LESSOR
ACCOUNTING
Lessor
Accounting
Lessor SalesType
Lessor
Topics
Lessor- Operating
Lessor – Direct
Finance
Lessor will classify lease as
either:
LESSOR
ACCOUNTING
Sales-type
Direct Financing
Operating
Lessor
Accounting
Lessor
Accounting
LESSOR
SALES-TYPE
Lessor
Topics
LessorOperating
Lessor – Direct
Finance
LESSOR
SALES
TYPE
 Transfers ownership of asset
 Grants lessee option to purchase that is
reasonably certain
 Lease term is for major part of the
remaining economic life of asset
 PV of payments exceeds substantially all of
FV of asset
 Specialized asset that will have no other
use
Lessor
Accounting
Lessor
Accounting
Lessor SalesType
Lessor
Topics
LessorOperating
LESSOR – DIRECT
FINANCE
LESSOR
DIRECT
FINANCING
Both of the following must be met:
 PV of payments along with any
from an unrelated 3rd party
exceeds substantially all of FV of
asset
 Probable that the lessor will
collect payments plus any amount
necessary to satisfy residual value
guarantee
Lessor
Accounting
Lessor
Accounting
Lessor Sales-Type
Lessor
Topics
LESSOR OPERATING
Lessor – Direct
Finance
LESSOR
OPERATING
Any lease that does not meet the definition of
sales-type or direct-finance is an operating
lease.
Lessor
Accounting
Lessor SalesType
LESSOR
ACCOUNTING
Lessor
Topics
LessorOperating
Lessor – Direct
Finance
 Operating Lease
 Continue to recognize underlying asset
 Recognize lease payment as income
over lease term, generally straight-line
basis
 Sales-Type
LESSOR
ACCOUNTING
 Derecognize underlying asset and
recognize net investment in lease and
selling profit (loss) if collectability is
probable
 If collectability is not probable, recognize
lease payment received as a deposit
liability (do not derecognize lease)
 Direct Finance Lease
 Derecognize underlying asset and
recognize net investment in the lease
 Selling profit is deferred and recognized
over lease term
 Selling loss is recognized up front
Overview
THINGS TO
CONSIDER
Presentation
Lessor
Topics
Things To
Consider
ANIMAL
PRODUCTION
Grower Contracts:
Lease component applicable to the
house
ANIMAL
PRODUCTION
Contract that may have both a:
lease component and
Non-lease component applicable to
the grower services they perform
Equipment:
Lease component applicable to the
equipment leased
non-lease component
Non-lease component applicable to
maintenance
THINGS TO
CONSIDER
 Ensuring staff will be fully trained
 Understanding the modified retrospective
transition approach
 Working with your auditor
 Modifying IT systems if necessary
 Determining interim disclosures
 Reviewing debt covenants
 Reviewing employee compensation
agreements
 Educating key stakeholders
Income & Estate Tax Update
 Income Tax Legislation – 2016 and Beyond
 Estate Tax Update
 Budget and Other Top Tax Issues
 Other Noteworthy Items
Tax Legislation
Since June 2015
Legislative Focus – Past Year

Stopgap Highway Bill Includes New Tax Compliance
Measures – Signed July 31, 2015
 Protecting Americans From Tax Hikes Act Of 2015Signed December 18, 2015

Continued Discussion of Comprehensive Tax Reform
Surface Transportation Act of 2015
(Highway Funding Bill)
 Changes the Filing Deadlines of Certain Returns
 6 Year Statute for Basis Overstatement
 Requires Consistency B/T Estate Tax Value &
Income Tax Basis of Assets
2015 Highway Funding Bill (Cont.)
2016 Tax Return Due Date Changes:
 1065 & 1120S :15th day of 3rd month plus 6month extension
 1120: 15th day of 4th month plus 5-month
extension
 For C Corps with June 30th year-end,
changes not effective until 12/31/2025
2015 Highway Funding Bill (Cont.)
More 2016 Tax Return Due Date Changes:
 Form 1041 gets new 5 ½ month extension to
Sept. 30th (calendar year taxpayers)
 FinCEN 114 changed from 6/30 to 4/15 – but
now has a 6 month extension
 Form 5500 – new 3 ½ month extension to
November 15th
Protecting Americans from Tax Hikes Act of 2015
(PATH Act)
 Addressed Extender Renewals
 Made Many Popular Provisions Permanent
 Provided Roadmap for Bonus Depreciation Provisions
PATH Act
Individual Impact
State & Local Sales Tax Deduction (Perm)
Higher Education Deduction (Thru 2017)
Child Tax Credit (Thru 2017)
Charitable Distributions from IRA’s (Perm)
PATH Act
Business Impact
 Reduced S-Corp Built-In Gains Recognition Period –
5 Years (Perm)
 Section 179 Expensing - $500k (Perm)
 R&D Tax Credit (Perm)
 WOTC (Thru 2019)
PATH Act
Business Impact
Bonus Depreciation:
2015 – 50%
2016 – 50%
2017 – 50%
2018 – 40%
2019 – 30%
American Taxpayer Relief Act
Estate Tax Review
 $5mm Indexed Exemption – Permanent
 Top Rate for 2013 and Beyond – 40%
 Permanent Unification of Estate, Gift &
GST Taxes
 Permanent Extension of Portability
Estate Taxes:
Post-American Taxpayer Relief Act
Calendar Year
Applicable Lifetime
Exclusion Amount
Top Rate
2013
$5,250,000
40%
2014
$5,340,000
40%
2015
$5,430,000
40%
2016
$5,450,000
40%
*Annual Gift Exclusion – Remains at 14,000 per Recipient for 2016
Obama Lays Out Tax Plans in Final Budget
 Continued renewal of tax proposals from previous budgets
related to both international tax and retirement savings.
 Revenue raising provisions - $2.8 trillion over next 10
years
Increase in LTGC Rate to 24.2%
Reinstatement of 2009 Estate and Gift Tax Rates
Expansion of Estate/Income Tax Consistency Rules
Adopting ‘Buffett Rule’ – Minimum 30% Rate
Limiting 1031 Like-Kind Exchange Deferral to $1mm
annually
Final Budget (Cont.)
IRS Budget/Tax Administration
Budget Set at $11.8 Billion for FY 2017
Represents a $530mm increase
Increase earmarked for Taxpayer Services, ID Theft
Prevention
PY budget requested a $2B Increase, but on $290mm
was approved
Top Tax Issues for the Remainder of 2016
1. PATH Act
2. Supreme Court on ACA Tax Credit
3. ACA Implementation Changes
4. Revised Repair Reg Rules
5. FATCA Implementation
6. New Partnership Audit Rules
7. Rules to Reign in Certain Partnership Strategies
8. Tax Related Identity Theft
9. Budget Pressures on IRS
10.Supreme Court on Same Sex Marriage
Partnership Audits – 2015
 The number of partnership returns filed with the IRS annually has
grown steadily in the last 10 years. In calendar year 2005, the IRS
received 2.7 million partnership returns. Filings topped 3 million
returns in CY 2007 and amounted to 3.77 million for CY 2014.
 The number of partnership audits has fluctuated over the last 10
years. In FY 2006, the IRS conducted 9,752 partnership audits,
which provided coverage of 0.36 percent of returns. The number of
audits essentially doubled in FY 2015, to 19,212, providing audit
coverage of 0.51 percent, the highest percentage in the last 10
years.
Pork Industry - Notable Items




1231 Capital Gain on Breeding Stock
Farmer Income Averaging
Cash Basis Accounting
Domestic Production Activities Deduction
(DPAD)
 Estimated Tax Requirements
 5 Year NOL Carryback Provisions
2016 Pork Management Conference
Thank You
TJ Boyle, CPA
[email protected]
Rob Gunther, CPA
[email protected]
Frost, PLLC
(800) 766-9241
Direct: (501) 975-0112