SAB 74 DISCLOSURE ANALYSIS FOR LEASE ACCOUNTING

INCOME STATEMENTUnder ASC 842, there is expected to be little impact to the income statement. Operating leases will still bepresented on the same line-item on the income statement, the same as under the current standards, ASC 840. Forfinance leases, which replace capital leases under ASC 840, the interest and amortization will still be presentedseparately. As a result, we expect few of the remaining 66% still evaluating and the 6% that did not comment on theincome statement impacts to find a material impact to the income statement.CASH FLOW STATEMENTThe new standard requires leases to be reported as finance activities on the cash flow statement rather than asoperating activities, which was required under ASC 840. However, this change is not expected to change net cashflows because the decrease in operating activities should result in an equal increase in finance activities. Therefore,we do not expect that many of the 64% of companies still evaluating or 18% that did not comment on cash flowstatements to find that there is a material impact to their net cash flow statements.EARLY ADOPTIONWith the revenue recognition standard (ASC 606) a number of companies including Alphabet, Microsoft, GeneralDynamics, Ford, and Raytheon were early adopters. The lease accounting standard has very few early adoptersthus far. Only one of the 100 companies analyzed, Microsoft, has early adopted.TRANSITION METHODWith other recent accounting changes, such as revenue recognition, much of the focus for SAB 74 disclosures wason the transition approach being adopted. However, until recently, only a modified retrospective approach wasallowed under ASC 842. The modified retrospective method would have required companies to not only transitionat the date of adoption, but also provide reports of their lease data under ASC 842 from the earliest comparativeperiod to the effective date. For example, companies who will adopt on January 1, 2019 would have beenrequired to report their lease data from January 1, 2017 to January 1, 2019 under both ASC 840 and ASC 842.However, on March 7, 2018 FASB voted to offer a simpler transition method that eliminates the need forcomparative reporting. We expect that many companies will choose this approach as it reduces the implementationburden for corporate accounting organizations. Several companies, including Walt Disney and Advance AutoParts, referred to the proposal in their disclosures, though did not state whether they would elect the option ifapproved. We anticipate that now that the proposal has been approved, many SEC files will state which transitionapproach they will use in their next disclosures.6SAB 74 DISCLOSURE ANALYSIS FOR LEASE ACCOUNTING (ASC 842)

PRACTICAL EXPEDIENTSAmongst our sample set, only six companies indicated an intention to elect the practical expedients available underASC 842. Another five companies indicated that they were investigating the practical expedients. However, mostdid not provide any commentary.ADOPTING PRACTICAL EXPEDIENTS100%90%80%70%60%50%40%30%20%10%0%Decided to AdoptEvaluatingNo CommentEXAMPLES OF DISCLOSURE COMMENTS RELATED TO PRACTICAL EXPEDIENTSSEC REGISTRANT EXCERPT OF DISCLOSURETargetWe will take advantage of the transition package of practical expedients permitted withinthe new standard, which among other things, allows us to carryforward the historical leaseclassification. In addition, we are electing the hindsight practical expedient to determinethe reasonably certain lease term for existing leases. While lease classification will remainunchanged, hindsight will result in generally shorter accounting lease terms and useful livesof the corresponding leasehold improvements. We will make an accounting policy electionthat will keep leases with an initial term of 12 months or less off of the balance sheet and willresult in recognizing those lease payments in the Consolidated Statements of Operations on astraight-line basis over the lease term.Duke EnergyUpon adoption, Duke Energy expects to elect the practical expedients, which wouldrequire no reassessment of whether existing contracts are or contain leases as well as noreassessment of lease classification for existing leases. Additionally, we expect to adopt theoptional transition practical expedient allowing the entity not to reassess the accounting forland easements that currently exist at the adoption of the lease standard on January 1, 2019.EquinixThe Company plans to elect the practical expedient that it will not reassess whether anyexpired or existing contracts are or contain leases, the lease classification for any expired orexisting leases or initial direct costs for any existing leases. The Company does not plan toelect the practical expedient to use hindsight in determining the lease term and in assessingimpairment of right-of-use assets.TOP 100 US PUBLIC COMPANIES RANKED BY LEASING OBLIGATIONS7

IMPLEMENTATION PROGRESSThe level of information disclosed about the progress of implementation efforts is still relatively limited by most filers.A significant work effort will be required to comply with the new lease accounting standards by most companieswith portfolios in excess of 100M. Changes will be required to accounting systems, business processes, andfinancial controls. A cross-functional project team will need to be formed consisting of stakeholders that use theleased assets such as Real Estate, IT, and Operations as well as corporate functions that administer the leases suchas Procurement, Corporate Treasury, and Accounts Payable.The project team will need to devise a strategy for identifying all of the leasing contracts across the enterpriseincluding categories such as real estate, IT, fleet, material handling, and other industry-specific assets. Once thepopulation of leases is identified, the contracts for each will need to be identified in order to abstract the datanecessary for accounting. Most companies will implement a new software application designed to perform thespecialized lease accounting required for ASC 842. Once selected, the software application will need to be testedfor functionality, integrated with other financial systems, and rolled out with training to end users.EXAMPLES OF DISCLOSURE COMMENTS RELATED TO IMPLEMENTATION8SEC REGISTRANTEXCERPT OF DISCLOSUREAutoZoneThe Company established a cross-functional implementation team to evaluate and identify theimpact of ASU 2016-02 on the Company’s financial position, results of operations and cashflows. Based on the preliminary work completed, the Company is considering the possibleimplications of the new standard, including the discount rate to be used in valuing newand existing leases, the treatment of existing favorable and unfavorable lease agreementsacquired in connection with previous acquisitions, procedural and operational changes thatmay be necessary to comply with the provisions of the guidance and all applicable financialstatement disclosures required by the new guidance. The Company is also in the process ofidentifying changes to its business processes, systems and controls to support adoption of thenew standard.O’ReillyAutomotiveWe have established a task force, composed of multiple functional groups inside of theCompany, which is currently in the process of evaluating critical components of this newguidance and the potential impact of the guidance on our financial position, results ofoperations and cash flows. Based on the preliminary work completed, we are consideringthe potential implications of the new standard on determining the discount rate to be used invaluing new and existing leases, the treatment of existing favorable and unfavorable leaseagreements acquired in connection with previous acquisitions, procedural and operationalchanges that may be necessary to comply with the provisions of the guidance and allapplicable financial statement disclosures required by the guidance, all of which are areasthat could potentially be impacted by adoption of the guidance.KrogerThis evaluation process includes reviewing all forms of leases, performing a completenessassessment over the lease population, analyzing the practical expedients and assessingopportunities to make certain changes to the Company’s lease accounting informationtechnology system in order to determine the best implementation strategy.DollarGeneralSpecifically, the Company has formed a project team that is developing test plans for itslease accounting system, identifying and evaluating existing contracts for embedded leases,and discussing implementation plans with its lease accounting software vendor, among otheractivities.SAB 74 DISCLOSURE ANALYSIS FOR LEASE ACCOUNTING (ASC 842)

PROJECT TEAMAmongst our sample set, only 13% indicated that a project team had been formed to address the new standard.Leadership of the lease accounting project typically sits within the finance or accounting team. However, unlikemany other accounting change projects, there is a need for a cross-functional enterprise team to address theleasing standards.A significant amount of business process transformation and data collection will be required from both theusers of leased assets and the corporate functions that support the leasing program. The users of leased assetsspan almost every function in the business, including Corporate IT, Real Estate, Fleet, and Operations. Theorganizations that touch leases throughout their lifecycle include Legal and Procurement, Treasury and Tax, andAccounts Payable and Receivables.PROJECT TEAM100%90%80%70%60%50%40%30%20%10%0%Team EstablishedNo CommentEXAMPLES OF DISCLOSURE COMMENTS RELATED TO PROJECT TEAMSSEC REGISTRANT EXCERPT OF DISCLOSURENew YorkCommunityBancorpThe company has assembled a project management team, formed a working groupcomprised of associates from different disciplines, such as Vendor Risk Management, RealEstate, and Technology, including working with associates engaged in the procurement ofgoods and services used in the Company’s operations. We have made substantial progress inreviewing contractual arrangements for embedded leases in an effort to identify the Company’sfull lease population and is presently evaluating all of its leases, as well as contracts that maycontain embedded leases, for compliance with the new lease accounting rules.DaVitaThe Company has assembled an internal lease task force that meets regularly to discussand evaluate the overall impact of this guidance on its consolidated financial statements andrelated disclosures, as well as the expected timing of adoption.Telephone &Data SystemsAt Cellco, a cross-functional coordinated implementation team has been establishedto implement the standard update related to leases. The Partnership is in the process ofdetermining the scope of arrangements that will be subject to this standard as well asassessing the impact to its systems, processes and internal controls to meet the standardupdate’s reporting and disclosure requirements.TOP 100 US PUBLIC COMPANIES RANKED BY LEASING OBLIGATIONS9

SOFTWARE EVALUATION AND SELECTIONSimilarly, amongst the filers we reviewed only 18% are evaluating or have selected a lease accounting softwareapplication. Historically, most companies have performed lease accounting and financial reporting under the currentstandards using a collection of spreadsheets. Although ASC 842 does not require the use of any specific softwareapplication, we believe that most companies with leasing portfolios in excess of 50M will elect to purchase newtechnology.Since the introduction of ASC 842, a number of commercial, off-the-shelf software packages have been releasedto the market specifically designed to support the new lease accounting requirements. These applications featurededicated leasing subledgers that track all the necessary journal entries, accounting engines to perform multipleset-of-book reporting, and algorithms to automatically classify contracts as operating or finance leases.SOFTWARE EVALUATION AND SELECTION90%80%70%60%50%40%30%20%10%0%Evaluating SoftwareVendor SelectedImplementingSoftwareNo CommentsEXAMPLES OF DISCLOSURE COMMENTS RELATED TO SOFTWARE IMPLEMENTATION10SEC REGISTRANTEXCERPT OF DISCLOSUREAdvanceAuto PartsThe Company has selected its leasing software solution and is in the process of identifyingchanges to its business processes, systems and controls to support adoption of the newstandard in 2019.Ascena RetailGroupThe Company is also in the process of implementing a new lease administration systemand identifying changes to its business processes and controls to support adoption of thenew standard in Fiscal 2020.CenturyLinkWe have completed our initial assessment of our business and system requirementsand we are currently developing and implementing a new lease accounting andadministrative system to comply with the requirements of ASU 2016-02.Valero EnergyWe are enhancing our contracting and lease evaluation systems and related processes,and we are developing a new lease accounting system to capture our leases and supportthe required disclosures. During 2018, we will continue to monitor the adoption processto ensure compliance with accounting and disclosure requirements. We also continue theintegration of our lease accounting system with our general ledger, and we will makemodifications to the related procurement and payment processes.SAB 74 DISCLOSURE ANALYSIS FOR LEASE ACCOUNTING (ASC 842)

POLICIES AND CONTROLSOf the companies we analyzed, only 18% are evaluating or implementing new policies and controls to support thestandard. With leases representing a significant set of assets and liabilities on the balance sheet, many companiesmay adopt additional best practices to ensure that leasing portfolios are being optimized.Accounting organizations will need to ensure that they maintain complete, accurate, and up-to-date records of allleases across the business not only at commencement of the contract, but also throughout the term of the agreement.New business processes will need to be put in place to ensure all the necessary data required for accounting iscollected at the start of the lease. Controls will be required to ensure that any contractual updates or business planchanges resulting in a modification or reassessment are relayed to the accounting organization.CHANGES TO POLICIES AND CONTROLS90%80%70%60%50%40%30%20%10%0%Evaluating ChangesImplementing ChangesNo CommentsEXAMPLES OF DISCLOSURE COMMENTS RELATED TO POLICIES AND CONTROLSSEC REGISTRANTEXCERPT OF DISCLOSUREStarbucksIn preparation for adoption of the guidance, we are in the process of implementing controlsand key system changes to enable the preparation of financial information.IBMA cross-functional implementation team has been established which is evaluating the leaseportfolio, system, process and policy change requirements.MarathonPetroleumWe are currently evaluating the impact of this standard on our financial statements and disclosures,internal controls and accounting policies. This evaluation process includes reviewing all forms ofleases, performing a completeness assessment over the lease population and analyzing the practicalexpedients in order to determine the best path of implementing changes to existing processes andcontrols along with necessary system implementations. We completed our system implementationevaluation during the fourth quarter of 2017, and concluded we will implement a third-partysupported lease accounting information system solution to account for our leases. We have beguna project to implement this system and are currently collecting the necessary information on our leasepopulation, establishing a new lease accounting process and designing new internal controls for thenew process. We do not plan to early adopt the standard. We believe the impact will be materialon the consolidated financial statements as all leases will be recognized as a right of use asset andlease obligation. Based on results of our evaluation process to date, we also believe the impact on ourexisting processes, controls and information systems may be material.TOP 100 US PUBLIC COMPANIES RANKED BY LEASING OBLIGATIONS11

LEASE ACCOUNTING CHANGEEXAMPLES OF STANDARD DISCLOSURE COMMENTS ON ASC 84212SEC REGISTRANTEXCERPT OF DISCLOSURENRG EnergyThe Company will adopt the standard effective January 1, 2019, and expects to electcertain of the practical expedients permitted, including the expedient that permits theCompany to retain its existing lease assessment and classification. The Company iscurrently working through an adoption plan which includes the evaluation of lease contractscompared to the new standard. While the Company is currently evaluating the impact thenew guidance will have on its financial position and results of operations, the Companyexpects to recognize lease liabilities and right of use assets. The extent of the increase toassets and liabilities associated with these amounts remains to be determined pending theCompany’s review of its existing lease contracts and service contracts which may containembedded leases. While this review is still in process, NRG believes the adoption of Topic842 will have a material impact on its financial statements. The Company is continuingto monitor potential changes to Topic 842 that have been proposed by the FASB and willassess any necessary changes to the implementation process as the guidance is updated.CenturyLinkWe have completed our initial assessment of our business and system requirements andwe are currently developing and implementing a new lease accounting and administrativesystem to comply with the requirements of ASU 2016-02. We plan to adopt the standardwhen it becomes effective for us beginning January 1, 2019 and the adoption of thestandard will result in the recognition of right of use assets and lease liabilities that have notpreviously been recorded. Although we believe it is premature as of the date of this reportto provide any estimate of the impact of adopting ASU 2016-02, we do expect that it willhave a material impact on our consolidated financial statements. Additionally, upon theJanuary 1, 2019, implementation of ASU 2016-02, accounting for the failed-sale-leasebacktransaction described in Note 3—Sale of Data Centers and Colocation Business will nolonger be applicable based on our facts and circumstances, and the real estate assets andcorresponding financing obligation will be derecognized from our consolidated balancesheet.ConocoPhillipsWe plan to adopt ASU No. 2016-02, as amended, effective January 1, 2019, andcontinue to evaluate the ASU to determine the impact of adoption on our consolidatedfinancial statements and disclosures, accounting policies and systems, business processes,and internal controls. We also continue to monitor proposals issued by the FASB to clarifythe ASU and certain industry implementation issues. While our evaluation of ASU No.2016-02 and related implementation activities are ongoing, we expect the adoption of theASU to have a material impact on our consolidated financial statements and disclosures.For additional information, see Note 24—New Accounting Standards, in the Notes toConsolidated Financial Statements.SAB 74 DISCLOSURE ANALYSIS FOR LEASE ACCOUNTING (ASC 842)

SAB 74 DISCLOSURESEXCERPT

6 SAB 74 DISCLOSURE ANALYSIS FOR LEASE ACCOUNTING (ASC 842) INCOME STATEMENT Under ASC 842, there is expected to be little impact to the income statement . Operating leases will still be presented on the same line-item on the income statement, the same as File Size: 1MB