June 22, 2017

Annual Meetings: Not What They Used To Be? (A Firsthand Account)

At the risk of depressing our resident “Annual Meeting Fanboy” – this Joe Nocera article is notable just because the mainstream media doesn’t report much on the state of annual meetings. Joe attended four meetings – in a single day! – as background for his piece.

He suggests annual shareholder meetings aren’t what they used to be (and perhaps they never really did have much value). No more free coffee! No more swag!  Here’s an excerpt:

Look, I get why good-governance types want to prevent companies from holding online-only meetings. As my old friend Nell Minow, a long-time corporate governance expert, put it in an email, “I think the threat of looking unhappy investors in the eye and having to answer questions in person still makes a difference.” My Bloomberg View colleagues made a similar argument, among others, in an April 12 editorial.

But from what I can see, this reasoning, though sensible in theory, doesn’t reflect reality. None of the shareholders I’ve seen are likely to strike fear in a chief executive or board member. And shareholders who do have the clout to shake up a company, like Carl Icahn, hardly wait around for the annual meeting. They own enough stock to command private meetings with management.

Virtual-Only Meetings: CII Weighs In

Recently, Broadridge reconvened its “Committee for Best Practices for Annual Shareholder Meetings” in an effort to update its guidelines for virtual annual meetings since they’re five years old. Earlier this month, CII sent this letter to the Committee to reaffirm its opposition to virtual-only meetings.

New Lease Accounting: Parsing an Example

Beginning in 2019, under the FASB’s ASU 2016-02, companies will need to recognize assets & liabilities for operating leases (see these memos in our “Lease Accounting” Practice Area). This blog by Steve Quinlivan gives the following example:

Lessee enters into a 10-year lease of an asset, with an option to extend for an additional 5 years. Lease payments are $50,000 per year during the initial term and $55,000 per year during the optional period, all payable at the beginning of each year. Lessee incurs initial direct costs of $15,000.

At the commencement date, Lessee concludes that it is not reasonably certain to exercise the option to extend the lease and, therefore, determines the lease term to be 10 years. Lessee also determines the lease is an operating lease.

The rate implicit in the lease is not readily determinable. Lessee’s incremental borrowing rate is 5.87 percent, which reflects the fixed rate at which Lessee could borrow a similar amount in the same currency, for the same term, and with similar collateral as in the lease at the commencement date.

At the commencement date, Lessee makes the lease payment for the first year, incurs initial direct costs, and measures the lease liability at the present value of the remaining 9 payments of $50,000, discounted at the rate of 5.87 percent, which is $342,017. Lessee also measures a right-of-use asset of $407,017 (the initial measurement of the lease liability plus the initial direct costs and the lease payment for the first year).

Lessee determines the cost of the lease to be $515,000 (sum of the lease payments for the lease term and initial direct costs incurred by Lessee). The annual lease expense to be recognized is therefore $51,500 ($515,000 ÷ 10 years).

At the end of the first year of the lease, the carrying amount of Lessee’s lease liability is $362,093 ($342,017 + $20,076; the $20,076 represents accrued interest on the lease liability), and the carrying amount of the right-of-use asset is $375,593 (the carrying amount of the lease liability plus the remaining initial direct costs, which equal $13,500).

As John blogged last week, Microsoft is voluntarily adopting the new lease standard on July 1st – you may be able to glean some pointers from their disclosure.

Liz Dunshee