Overview / Intro Questions

What is ASC 842?

ASC 842 is the FASB’s new lease accounting standards which replaces the current guidance, ASC 840, effective December 15, 2018. The new standards introduce changes to how companies are required to account for operating leases on the balance sheet. In the past, companies capitalized their financing leases while operating leases were disclosed in the footnotes. However, to increase transparency into the financial standing of companies, FASB created ASC 842 so that right-of-use assets and lease liabilities for all operating leases longer than 12 months are recorded on the balance sheet at present value discounting using a collateralized incremental borrowing rate (IBR).

Why is a borrowing rate needed for ASC 842 compliance?

Under ASC 842, the lease liability is estimated by finding the present value of future lease payments at a discount rate which complies with the new standards. Once the lease liability is determined, it serves as a starting point for determining the right-of-use asset. To record the right-of-use asset, companies will start with the lease liability and adjust for payments made prior to the lease commencement date, lease incentives offered to the lessor, and initial indirect costs to arrive at the asset value. Sourcing accurate inputs, namely the discount rate, will be important for companies to properly perform a present value calculation of their lease liability.

A lessee could ascertain the implied discount rate from the lease contract, if the lessee was provided certain information by the lessor. This information includes the fair value of the underlying leased asset, the estimated residual value of the leased asset, and any initial indirect costs incurred by the lessor. These calculation inputs are rarely available to the lessee to determine an implied discount rate.   

Recognizing this issue, ASC 842 recommends that companies use their incremental borrowing rate (IBR). The guidelines define the IBR as: “the rate of interest that a lessee would have to pay to borrow on a collateralized basis over a similar term an amount equal to the lease payments in a similar economic environment.”

What does LeaseSCRE estimate?

LeaseSCRE provides lessees with a market-based collateralized incremental borrowing rate estimation under ASC 842 that may require a company specific or lease/collateral specific adjustment determined by the company.

How does LeaseSCRE estimate a collateralized borrowing rate?

At a high level, LeaseSCRE performs a 3-step process when estimating a collateralized borrowing rate:

  • Estimate the lessee’s credit risk via a calculation of the company’s potential credit rating
  • Derive an unadjusted unsecured borrowing rate using the estimated credit rating by averaging CDS spreads of companies with the same rating
  • Adjust the rate to reflect borrowing on collateralized basis

You can read about or process and methodology in further detail here.

Technical Questions

Can I use LeaseSCRE for areas outside of ASC 842?

LeaseSCRE was developed for the sole purpose of estimating an IBR to present value leases. We do not recommend or support any other use.

Can I use LeaseSCRE for IFRS16?

The Machine Learning model that estimates credit ratings was trained with public company data from US listed companies only.  We have not tested the accuracy of the credit ratings estimate for non-US Companies. 

LeaseSCRE generates a credit rating associated with my company. Is this a credit rating opinion or judgement?

Any credit ratings generated or displayed by LeaseSCRE are estimates based on historical analysis of publicly available S&P credit ratings. Given that the ratings are estimations of what a rating agency may provide as a rating, they do not represent an opinion or judgement of the creditworthiness of a company.

Does the LeaseSCRE output represent an opinion of a company’s collateralized borrowing cost?

LeaseSCRE’s output is an estimate of a rating specific collateralized incremental borrowing cost and does not represent an opinion on the company’s hypothetical collateralized borrowing cost.

Will Alvarez & Marsal support the results of LeaseSCRE with my auditor?

LeaseSCRE was designed to be used by the company and supported by the company using the White Paper found here. If you would like to engage Alvarez & Marsal Valuation Services LLC to assist you with your financial reporting around ASC 842, email us at help-leasescre@alvarezandmarsal.com to discuss.

What is Machine Learning and how can I support this?

Our Machine Learning model is a recursive algorithm that is trained on data to predict the outcome of similar data.  Please see our White Paper found here to support the results.  The accuracy of our model is greater than any other model we have seen.  No other model we have seen is greater than 90%.  The accuracy is what makes our machine learning model supportable.

How are you able to do in minutes what my 3rd party consultants have taken weeks to do?

We have taken out subjectivity and created an automated process using Machine Learning, publicly traded Credit Default Swap data, and bond yields to estimate a collateralized IBR.  There are a lot of factors that are important, we spent a lot of time building the best machine learning model considering those factors to estimate S&P credit ratings.  We are not recreating the wheel for every company because we created an automated process that results in a better wheel.

What about my leases in foreign currencies?

LeaseSCRE is still the best starting point for discounting those leases, but you will need to find Foreign Currency (FX) forward curves to apply to payments before discounting with the IBR.  Foreign Currency forwards take into account the different risks between discount rates of the two countries.  Credit worthiness and IBR of a US company with leases in foreign countries not impacted because the lease or buy decision will be based on central treasury financing costs.  If the company believes that the foreign country lease is not based on central treasury financing costs and the premium or discount on the lease is also not captured in the FX forward rates, then a lease specific adjustment should be made to the LeaseSCRE estimated IBR curve.

Usage Questions

What types of companies can use LeaseSCRE for ASC 842 compliance?

Any US based company outside of the financial sector with existing operations.

What should I do before buying LeaseSCRE.

We recommend that you undergo three steps before purchasing LeaseSCRE: 1) Ensure that your company is included in the scope of LeaseSCRE, namely that it is a US based company outside of the financial sector with existing operations. 2) Examine our White Paper (which can be found here) with your auditors to ensure that both sides are comfortable with the process and methodology followed in developing an incremental borrowing rate 3) Ensure that you have the required data to run the analysis. We require the following data points as part of our calculation:

  • Company Sector
  • LTM Income Statement info: Revenue, Gross Profit, EBITDA, EBIT, Interest Expense, Net Income
  • Balance Sheet info: Long Term Assets, Total Assets, Total Debt, Total Liabilities, Retained Earnings, Shareholders Equity
  • LTM Cash Flow Statement Info: Cash Flow From Operations, Dividends Paid, Total Cash Flow

What information do I need?

We require the following data points as part of our calculation:

  • Company Sector
  • LTM Income Statement info: Revenue, Gross Profit, EBITDA, EBIT, Interest Expense, Net Income
  • Balance Sheet info: Long Term Assets, Total Assets, Total Debt, Total Liabilities, Retained Earnings, Shareholders Equity
  • LTM Cash Flow Statement Info: Cash Flow From Operations, Dividends Paid, Total Cash Flow

I have received a curve of collateralized incremental borrowing rates from LeaseSCRE. Which one do I use?

For each lease that you are discounting select the “t” value (in months) that matches the maturity of your lease and the corresponding rate.  Adjust the rate as you determine appropriate for company specific adjustments or lease/collateral specific adjustments.

Can I make adjustments to the LeaseSCRE output?

There are certain lease specific adjustments that companies may want to make to reflect specific considerations concerning their lease obligation. For example, companies can adjust for the marketability or liquidity of the leased asset. Leased assets that are specialized in nature can make the job difficult for a lender to find a buyer for the asset if the borrower defaults. Consider a situation where a company is taking on a lease to build a custom gas compressor located near a secured military zone and another company is taking on a lease for the same amount and tenor to build a warehousing facility near a large metropolitan area. A lender would have an easier time finding a buyer for the warehouse than for the gas compressor because the warehouse is more fungible than the gas compressor. Another adjustment example is collectability. Lenders may want to charge a higher rate for assets that are less collectible, such as a wellhead in West Texas, than for assets that are more easily collectible, such as a fleet of vehicles in New York City. Because there are many lease specific factors, such as specialization and collectability, that impact a lender’s required yield, lessees should consider an adjustment to the incremental borrowing rate produced by LeaseSCRE to reflect lease specific factors.

I purchased a credit but do not want to use LeaseSCRE. Can I receive a refund?

Please contact us at help-leasescre@alvarezandmarsal.com to discuss.

The output of LeaseSCRE is not close to my expectations.

Please contact us at help-leasescre@alvarezandmarsal.com to discuss.

Glossary based Questions

What should I include / exclude from Revenue?

Note that while certain items in this definition are financial in nature, companies whose primary sector is Financials are excluded from LeaseSCRE.

Revenues include: Accident and Health Premiums Earned, Asset Management Fee, Brokerage Commission, Credit Card Fee, Commission and Fees, Income (Loss) on Equity Invest. (Income Block), Fees and Other Income, Foreign Exchange Gain (Loss) – Income, Gain (Loss) on Sale of Assets – (Revenue Block), Gain (Loss) On Sale Of Investments and Securities (Rev), Gain (Loss) on Sale of Loans – (Revenue Block), Other Premiums Earned, Underwriting & Investment Banking Fee, Interest and Dividend Income Corporate Segment, Interest and Dividend Income Other than Corporate Segment, Income (Loss) on Real Estate Held for Investment – Income, Income (Loss) From Foreclosed Properties – (Rev), Life Insurance Premiums Earned, Loan Servicing Revenue, Mortgage Banking Activities, Mortgage Banking, Property Management Fee, Non-Insurance Activities Revenues, Property & Casualty Premiums Earned, Trading and Principal Transactions, Tenant Reimbursements Rental Revenues, Service Charges On Deposits, Revenues – (Collected), Cargo Revenues, Franchise Revenues, Gain (Loss) on Sale of Loans & Receivables – (Revenue Block) – (Collected), Management Fee, Passenger Revenues, Product Revenues, Research and Development Revenues, Royalty Income – (Rev), Rental Revenues, Service Revenues, Income From Trading Activities, Trust Income, Deductions from Sales, Insurance And Annuity Revenues, Excise Taxes Excluded from Sales, Other Non-Interest Income (Collected),

This item excludes: Excise Taxes Included in Sales (Supple), Provision for Doubtful Accounts – Patient Service Revenue.

Note that any impact of ASC 842 should not be included when entering in financial information.

How do I estimate Gross Profit?

Note that while certain items in this definition are financial in nature, companies whose primary sector is Financials are excluded from LeaseSCRE.

Gross Profit is estimated as Revenue (as defined above) less Cost of Goods sold.

Costs of Goods sold includes: Cost of Goods Sold, Total, Finance Div. Operating Exp., Insurance Division Operating Expenses, Interest Expense (Finance Division)

Note that any impact of ASC 842 should not be included when entering in financial information.

How do I estimate EBIT?

Note that while certain items in this definition are financial in nature, companies whose primary sector is Financials are excluded from LeaseSCRE.

EBIT is estimated as Gross Profit (defined above) less Operating Costs.

Operating Costs include: Selling General & Admin Expenses, Total, Depreciation & Amortization, Total – (IS), R&D Expenses, Other Operating Expenses

Note that any impact of ASC 842 should not be included when entering in financial information.

How do I estimate EBITDA?

Note that while certain items in this definition are financial in nature, companies whose primary sector is Financials are excluded from LeaseSCRE.

EBITDA is estimated as EBIT (defined above) plus Depreciation & Amortization.

Depreciation & Amortization includes: Depreciation, Amortization of Intangibles, Impairment of Oil, Gas & Mineral Properties, Amortization of Goodwill, Amortization of Goodwill, Amortization of Intangible Assets

Note that any impact of ASC 842 should not be included when entering in financial information.

How do I estimate Interest Expense?

Note that while certain items in this definition are financial in nature, companies whose primary sector is Financials are excluded from LeaseSCRE.

Interest Expense includes the following: Debt Issuance Costs, Interest Expense, Preferred Stock Dividend of Subsidiary, After Tax portion of Pref. Stock Dividend of Subsidiary, Dividend on Trust Pref. Securities, After Tax portion Dividend on Trust Pref. Securities.

Note that any impact of ASC 842 should not be included when entering in financial information.

How do I estimate Net Income?

Note that while certain items in this definition are financial in nature, companies whose primary sector is Financials are excluded from LeaseSCRE.

Net Income includes the following: Earnings from Continuing Operations, Earnings of Discontinued Operations, Extraordinary Item & Accounting Change, Minority Interest in Earnings

Note that any impact of ASC 842 should not be included when entering in financial information.

How do I estimate Total Assets?

Note that while certain items in this definition are financial in nature, companies whose primary sector is Financials are excluded from LeaseSCRE.

Total Assets includes the following: Total Current Assets, Net Property, Plant & Equipment, Long-term Investments, Goodwill, Other Intangibles, Total, Finance Div. Loans and Leases, LT, Finance Division Other Long-Term Assets, Other Assets.

Note that any impact of ASC 842 should not be included when entering in financial information.

How do I estimate total Long-Term assets?

Note that while certain items in this definition are financial in nature, companies whose primary sector is Financials are excluded from LeaseSCRE.

Long Term Assets are computed as Total Assets (defined above) less Current Assets.

Current Assets include: Total Cash & ST Investments, Total Receivables, Inventory, Prepaid Expenses, Finance Div. Loans and Leases, ST, Finance Division Other Current Assets, Other Current Assets, Trading Asset Securities

Note that any impact of ASC 842 should not be included when entering in financial information.

How do I estimate Total Debt?

Note that while certain items in this definition are financial in nature, companies whose primary sector is Financials are excluded from LeaseSCRE.

Long Term Debt includes: Short-term Borrowings, Current Portion of Long-Term Debt, Current Portion of Cap. Leases, Long-Term Debt, Capital Leases, Finance Div. Debt Current, Finance Div. Debt Non-Curr.

Note that any impact of ASC 842 should not be included when entering in financial information.

How do I estimate Total Liabilities?

Note that while certain items in this definition are financial in nature, companies whose primary sector is Financials are excluded from LeaseSCRE.

Total Liabilities include: Total Current Liabilities, Long-Term Debt, Capital Leases, Finance Division Debt Non-Current, Finance Division Other Non-Current Liabilities, Other Liabilities, Trust Preferred Securities

Note that any impact of ASC 842 should not be included when entering in financial information.

How do I estimate Retained Earnings?

Note that while certain items in this definition are financial in nature, companies whose primary sector is Financials are excluded from LeaseSCRE.

Retained Earnings includes: Earnings reinvested in business, Legal reserve, Income reinvested in the business, Deficit accumulated during development stage,

Retained earnings excludes: Accredited dividends, Market securities valuation reserves

Note that any impact of ASC 842 should not be included when entering in financial information.

How do I estimate Shareholders Equity?

Note that while certain items in this definition are financial in nature, companies whose primary sector is Financials are excluded from LeaseSCRE.

Shareholders Equity includes: Total Preferred Equity, Total Common Equity, Total Minority Interest

Note that any impact of ASC 842 should not be included when entering in financial information.

How do I estimate Cash Flow from Operations?

Note that while certain items in this definition are financial in nature, companies whose primary sector is Financials are excluded from LeaseSCRE.

Cash Flow from Operations includes:

Net Income and adjustments for: Depreciation and Amortization, Amortization of Deferred Charges, Gain/(Loss) From Sale Of Asset, Gain/(Loss) on Sale of Investments, Asset Writedown & Restructuring Costs, Net Increase/Decrease in Loans Orig/Sold, Provision for Credit Losses, (Income) Loss On Equity Investments, Stock-Based Compensation, Tax Benefit from Stock Options, Provision and Write-off of Bad Debts, Minority Interest in Earnings, Net Cash From Discontinued Ops., Other Operating Activities, Total, Change in Net Operating Assets.

Note that any impact of ASC 842 should not be included when entering in financial information.

How do I estimate Dividends Paid?

Note that while certain items in this definition are financial in nature, companies whose primary sector is Financials are excluded from LeaseSCRE.

Dividends paid includes both common and preferred stock dividends paid.

Dividends paid excludes: Payment of dividend by subsidiary, Distributions on company-obligated Mandatorily redeemable preferred stock of subsidiary trust, Return of capital

Note that any impact of ASC 842 should not be included when entering in financial information.

How do I estimate Total Cash Flow?

Note that while certain items in this definition are financial in nature, companies whose primary sector is Financials are excluded from LeaseSCRE.

Total Cash Flow represents net increase or decrease in cash or cash equivalents in the last twelve months and includes the following: Cash from Operations, Cash from Investing, Cash from Financing, Foreign Exchange rate Adjustments, Miscellaneous Cash Flow Adjustments

Note that any impact of ASC 842 should not be included when entering in financial information.