Changing the Accounting
Lecture with a small Flip
Alexander J. Sannella, Ph.D., CPA
Director, MBA in Professional Accounting
Program
Director, RBS Teaching Excellence Center
Old Dog wants to learn new tricks. Why?
• Teaching ratings still good but declining.
• Mega-lecture format coming in the fall (Rutgers Big
10 peer schools)
• The three “knock down rule” in New Jersey.
• Lack of student preparation and participation and
most students are clearly not engaged
• A bad case of laryngitis
• Pearson conference call: Can we deliver material in
small doses?
• My daughter, a recovering CPA.
Flipped Classroom
• Nothing new in education but it is new to me.
• Uses blended learning where students are required to
read material, watch short videos-followed by a series
of on-line quizzes.
• In-class time is devoted to exercises and discussion of
the video and other material and quizzes. Guest
speakers can also be used during class time.
• Instructors are supported by teaching assistants in
large lectures.
• Can it work in accounting? Penn State is typically sited
as a successful example (covers 1,300 accounting
students).
Flipped Classroom (continued)
• Class time is also devoted to the application of
concepts which enables the instructor to identify
student errors in thinking and understanding.
• Classroom discussion and the use of technology is
critical.
• The major issue for instructors is that this format will
require a great deal of time to re-tool courses and
course preparation time is increased.
• Covering exercises and class discussion will quickly
consume traditional lecture time-so topics may have to
be removed from the curriculum.
• Alternatively, assigned videos can be used to cover
these topics with little or no class discussion.
Flipped Classroom (continued)
• The major issue for students is that they must be
prepared for every class session. Students often
complain if there is a total lack of face-to-face
lecture time.
• Frequent feedback should be used to assess
learning and student satisfaction with the format
used (weekly surveys can be used).
• Class participation must be a significant portion of a
student’s total grade (15% to 20%). Students
frequently complain about the “subjectivity” of the
grade earned.
A Small Flip for Starters
• A Compromise: Use a blended approach with some
lecture time included.
• Student responsibility includes:
1. Preparation of mini-lectures and answering a series
of questions that will be discussed in class. The minilectures will be presented in part by the instructor.
2. The material contained in the mini-lectures are in the
form of 10 to 15 page “Modules” using Word files
(PowerPoint could also be used).
3. The textbook is a supplement.
4. Watching videos for topics that will not be presented
by the instructor.
A Small Flip for Starters (continued)
• In addition to the questions contained in the minilecture material (modules), students must be fully
prepared to answer other questions (“on the fly”)
and participate in class discussions.
• In all cases, questions are asked periodically
throughout the mini-lecture as well as at the end of
the module.
• Students discuss the questions in small, informal
groups and respond using a SRS (Student Response
System or clickers).
• Cell phones, laptops or iPad have the capability to
be used as clickers.
A Small Flip for Starters (continued)
• Depending on the responses
to the questions asked after
the discussion, the
instructor can determine if
material has to be covered
again or in more depth.
Sample Module
CHAPTER 21: ACCOUNTING FOR LEASES
Module 21-4
Module Contents
• Key lease disclosures for the lessee.
• Analytical capitalization of operating leases for
the lessee.
• Lease Accounting Standards Update (ASU)
proposal (Online Video in Blackboard)
Sample Module (continued)
Lessee Disclosures
•
Required disclosures for the lessee are extensive
under both US GAAP and IFRS.
• These disclosures are designed to provide the
reader with information regarding the relevant
assets and obligations under finance leases as well
as the “off balance sheet obligations” that may exist
for the lessee under the operating lease method.
• A sample lease disclosure is presented below.
Sample Module (continued)
Sample Lease Disclosures: Lease Footnote
Disclosures
(10) Lease Obligations TAL Airlines, Inc., leases
aircraft, airport passenger terminal space, aircraft
hangars and related maintenance facilities, cargo
terminals, other airport facilities, other commercial
real estate, office and computer equipment and
vehicles. At December 31, 2012, scheduled future
minimum lease payments under capital leases
(substantially all of which are for aircraft) and
operating leases having initial or remaining
noncancelable lease terms of more than one year
were as follows:
Sample Module (continued)
(In millions)
Payable during
2013
Operating Leases
Aircraft
Non-aircraft
$
782
$
489
Capital
Leases
$
177
2014
785
459
246
2015
761
445
314
2016
725
435
209
2017
696
422
433
2,691
3,432
637
$ 6,440
$ 5,682
$ 2,016
After 2017
Total minimum lease payments
Imputed interest (at rates of 1.5% to 10.0%)
Present value of minimum lease payments
Current portion
Long-term obligations under capital leases
(263)
1,753
(20)
$(1,733)
Sample Module (continued)
• As of December 31, 2012, we leased 230
mainline aircraft, 57 of which were under
capital leases.
• Amounts charged to rent expense, net of
minor amounts of sublease rentals, were
$1.0 billion in 2012, $1.1 billion in 2004
and $1.2 billion in 2003.
Sample Module (continued)
• ANALYTICAL IMPLICATIONS-CAPITALIZATION
OF OPERATING LEASES FOR THE LESSEE.
• To consider the effects of "off-balance sheet
financing," financial and credit analysts have
developed techniques that would "capitalize
operating leases" for the lessee. This is known as
constructive or analytical capitalization. That
is, estimates of the lease obligation and debt service
(i.e., interest expense) are calculated by the
analyst. These estimates are included in the
analysis of pro forma or projected financial
statements.
Sample Module (continued)
• Various rules of thumb have been developed by
rating agencies (e.g., Moody's and Standard and
Poor's) to capitalize operating leases. For example,
the lease obligation is estimated from the lease
footnote information by using 7 or 8 times rent
expense. The interest expense is computed as 1/3
rent expense and depreciation is estimated as 2/3
rent expense.
• Today, many rating agencies are using the
information provided in the lease footnote to employ
a discounted cash flow approach in estimating the
off balance sheet lease debt for operating leases.
Sample Module (continued)
Summary of Capitalization of Operating Leases
• Various rules of thumb have been developed by
rating agencies (e.g., Moody's and Standard and
Poor's) to capitalize operating leases. These rules of
thumb were originally designed for real estate
leases, the most common type of lease arrangement
at that time.
• At that time, multipliers as high as 10 times rent
expense were used to proxy the capitalized lease
debt. This was designed to capture the interest
rates and terms of the real estate debt.
Therefore, using a multiplier of 10 was viewed as a
representative present value factor for real estate
leases.
Sample Module (continued)
• Specifically, this rule of thumb was developed from
Real Estate Capitalization Rates.
• For long term real estate leases, the term can
extend 40 years. In this case, the number of
periods in a discounted cash flow application would
go to infinity (in perpetuity)
• As n ∞, the discount factor approaches 1 / i
(where i is the capitalization rate). So if the current
rate is 12.5% = 1/8, then the capitalized lease
value is computed as follows:
Sample Module (continued)
Capitalized Value =
Rent Expense x 1 / i =
=
Rent Expense x 1 / .125
=
Rent Expense x 1/ (1/8)
=
Rent Expense x 8
Sample Module (continued)
The Discounted Cash Flow Approach
• The DCF approach better utilizes the lease footnote
disclosure by estimating the "off-balance sheet"
lease obligation as the present value of the future
minimum lease payments.
• The key variable in this calculation is the
determination of the interest (discount) rate to use
in the present value (discount) calculation.
• One alternative is to use the weighted average
interest rate obtained from the long term debt
footnote. Another alternative is to estimate an
average discount rate from the information provided
for capitalized leases.
Sample Module (continued)
• The discounted value is the analysts' estimate of the long
term lease obligation for operating leases. With this
information, a parallel analysis can be made to compare
the true capital leases and the capitalized operating
leases.
• The capitalized leased asset is generally not created on a
pro forma basis.
• It should be noted that this method, as well as the rating
agency rules, are conservative approaches. Both methods
assume that all operating leases were misclassified and in
substance should have been recorded as capitalized lease
obligations.
• An illustration using a sample lease footnote is presented
below.
Sample Module (continued)
SAMPLE DISCLOSURES: Future minimum lease
payments, by year and in aggregate under
non- cancelable operating leases, were the
following at December 31, 2011:
Sample Module (continued)
For the years ended December 31
2012............................................
2013............................................
2014............................................
2015............................................
2016 ............................................
2017 and thereafter........................
Total minimum lease payments......
Amount
$300,000
200,500
100,000
80,000
75,000
400,500
$1,156,000
Sample Module (continued)
Applying Analytical Lease Capitalization
Real Estate Capitalization Factor:
2011 Lease Debt: Rent Expense x 7 = $450,000 x 7
= $3,150,000
Discounted Cash Flow Approach:
• Assume Cost of Debt Capital is 10%
Sample Module (continued)
Year
2012
2013
2014
2015
2016
2017 and Thereafter:
Total
Convert to an annuity due
Capitalized Lease Debt
Lease
Payment
$300,000
200,500
100,000
80,000
75,000
400,500
Discount Factor
@
10% for an
amount of $1
.90909
.82645
75132
.68301
.62092
.56447
Present
Value
$272,727
165,703
75,132
54,641
46,569
226,070
$840,842
X 1.10
$924,926
Sample Module (continued)
• Proposed changes in lease accounting.
• Watch video and use accompanying
PowerPoint slides. Both are in course
documents on Blackboard.
• https://blackboard.newark.rutgers.edu/webapps/portal/fram
eset.jsp
• Videos produced on Camtasia 2 and
uploaded to Blackboard.
Sample End of Module Questions
End of Module 21 – 4 Questions
True and False and Explain
• Required lessee disclosures allow a financial statement
user to capitalize operating leases.
• The capitalization of operating leases will impact the
current ratio, the debt / equity ratio and times interest
earned ratio.
• The proposed lease standards will result in having the
leased asset on the books of both the lessor and the
lessee.
• The proposed lease standards will result in lower EBIT,
EBITDA and net income for the lessee.
Classroom Discussion
• Use of technology: Student Response Systems or
clickers.
• Turning Technologies-Clickers have to be purchased
for about $40 and the school must purchase the
USB Receivers for each instructor ($200).
• Top Hat Monocle-Students can use their cell
phones, laptop, iPad, etc., as the clickers and can
answer questions directly on their mobile device.
• Here’s more information on Top Hat
Monocle. https://www.tophatmonocle.com/
Ice Breaker Questions-Disguised attendance
1. You just finished attending the Maroon 5 concert at
Revel. How many members are in the pop group
Maroon 5?
a. Four
b. Five
c. Six
d. Seven
Ice Breaker Questions-Disguised attendance
Ice Breaker Questions-Disguised attendance
(continued)
2. Did you know the answer or did you guess?
a. Yes
b. No
Ice Breaker Questions-Disguised attendance
(continued)
3. If you guessed, did you select the correct answer?
a. Yes
b. No
Questions?