Accounting for Leases Understanding the New Standards Recognition - - PowerPoint PPT Presentation

Accounting for Leases

Understanding the New Standards

Recognition Measurement & Presentation

Lessee

General

• Biggest difference is for operating leases for

the lessee – These will now be presented in the balance sheet – Under prior GAAP, only the finance lease would be reported on the balance sheet

General

• Basic theory

– The lessee obtains the right to use an asset – The lessee has an obligation to pay for the right – Not all leases are the same

General

• Recognition, measurement, and presentation for

expenses and cash flows will be determined by whether the lease is an operating or finance lease

General

• Optional periods

– Included only if the lessee is reasonably certain to exercise the option – This high threshold is similar to prior guidance

• Purchase option

– Included only if the lessee is reasonably certain to exercise the option

General

• Election to not recognize the lease on the

balance sheet – This is available for leases of twelve months

• r less

– The lease expense should be recognized straight-line over the lease term as an operating lease under the prior guidance

General

• Recognition, measurement and presentation of

expenses and cash flows has not changed in any significant way – Finance and operating leases are still handled separately

Finance Leases

• Basics

– Present a right-of-use asset and lease liability in the balance sheet

• Measured at the present value of the

lease payments

Finance Leases

• Basics

– In the income statement, recognize interest expense and amortization separately

• Also recognize any variable payments not

included in the lease liability in the period incurred

• Consider impairment under the rules for

long-lived assets

Finance Leases

• Basics

– In the statement of cash flows:

• The principal portion is a financing activity
• The interest and variable payments are
• perating activities

Operating Leases

• Basics

– In the income statement, recognize a single straight-line expense over the lease term

• Also recognize any variable payments not

included in the lease liability in the period incurred

• Consider impairment under the rules for

long-lived assets

Operating Leases

• Basics

– In the statement of cash flows, classify all payments as operating activities

Operating Leases

• Basics

– Assuming no impairment, remaining cost throughout the lease will be the total lease payments, plus direct costs, less costs recognized in prior periods

Initial Measurement

Initial Measurement

• At commencement, the lessee will recognize both

a right of use asset and a lease liability

Initial Measurement

• The lease liability will be measured at the present

value of the lease payments not yet paid – Discount rate

• The rate is calculated using information

available at the commencement date

• Use the rate implicit in the lease, if

readily available

• Otherwise, use the incremental

borrowing rate

• Non public entities may elect to simply use

the risk free rate for all leases

Initial Measurement

• The right of use asset cost will include the

following: – Initial measurement of the lease liability – Lease payments at or prior to the commencement date, reduced by an incentives received – Initial direct costs

• Commissions
• Payments to an existing

tenant to terminate

Initial Measurement

• Remeasurement

– The lease payments will be remeasured if any

• f the following occur
• The lease is modified and does not result in

a new contract

• Contingency is resolved for variable

payments making them fixed

Initial Measurement

• Remeasurement

– The lease payments will be remeasured if any

• f the following occur (cont.)
• Change in

– Term – Assessment of option exercise – Amounts owed under a residual value guarantee

• Adjustments will be

made using the rate at the remeasurement date

Subsequent Measurement

Subsequent Measurement

• Finance lease

– The lease liability will be measured by the following

• Increase the balance by interest for

the period

• Reduce the balance by lease payments for

the period

Subsequent Measurement

• Finance lease

– The right of use asset will be measured by the following

• Cost reduced by accumulated amortization

and any impairment losses – The interest and the amortization will be recognized separately

Subsequent Measurement

• Operating lease

– The lease liability will be measured at the present value of the payments not yet paid using the commencement date discount rate

Subsequent Measurement

• Operating lease

– The right of use asset will be measured by the following

• The lease liability
• Plus prepaid or accrued lease payments
• Plus unamortized direct costs
• Less impairment

Derecognition

Derecognition

• If the lease terminates prior to the expiration of

the term – Remove the asset – Remove the lease liability – Recognize the difference as profit or loss

Derecognition

• If the lease terminates as the result of purchase of

the asset – Remove the lease liability – Adjust the carrying amount of the asset by the difference between balance of the liability and the purchase price

Presentation Issues

Presentation Issues

• Statement of Position

– Right of use assets for finance leases and

• perating leases should be presented

separately from each other as well as from

• ther assets

– Lease liabilities for finance leases and

• perating leases should be presented

separately from each other as well as from

• ther liabilities

Presentation Issues

• Statement of Position (cont.)

– This detail may be presented on the face of the statement of position or in the notes

• If not on the statement, the notes must

identify the line item containing them

Presentation Issues

• Statement of Position (cont.)

– The determination of current and noncurrent classification will be the same as for other nonfinancial assets and financial liabilities

Presentation Issues

• Statement of Position (cont.)

– You are NOT allowed to present finance and

• perating right of use assets in the same

line item – You are NOT allowed to present finance and

• perating lease liabilities in the same line item

Presentation Issues

• Statement of comprehensive income (or income)

– Finance lease

• Interest expense on the lease liability and

amortization of the right of use asset are not required to be presented separately from

• ther items
• They should be presented similar to other

interest, depreciation or amortization items – Operating lease

• The expense goes into the income from

continuing operations

Presentation Issues

• Statement of cash flows

– Operating lease

• Under normal operating activities, the lease

payments are investing

• Variable lease payments not in the liability

are operating

Disclosures

Disclosures

• These disclosures are designed provide the users

with information to assess amounts, timing and uncertainty of cash flows related to leases – This information will include both quantitative and qualitative information about the lease, judgments and amounts – The amount of detail is a matter of professional judgment, but should satisfy the needs of the users

Disclosures

• Information about the leases

– General description – How variable payments are determined – Option and termination provisions

• Provide a narrative about which options are

included an which are not

Disclosures

• Information about the leases (cont.)

– Information about residual value guarantees – Restrictions imposed by the leases – The previous should be disclosed for subleases as well

Disclosures

• Information about leases which have not

commenced, but create significant rights and obligations – Include any information about involvement in asset construction

Disclosures

• Significant assumptions and judgments and other

information including – Determination of whether a contract has a lease – Consideration allocation between lease and nonlease components – Determination of the discount rate

Disclosures

• Disclosures for each period about the total

lease costs – Separated amortization and interest for finance leases – Cost of operating leases – Short-term lease costs

Disclosures

• Disclosures for each period about the total lease

costs (cont.) – Variable lease costs – Sublease income, disclosed gross and separated from the finance or operating lease – Net gain or loss from sales and leasebacks

Disclosures

• Disclosures for each period about the total lease

costs (cont.) – The following amounts separated by finance and operating

• Cash paid in the measurement of

lease liabilities

• Supplemental noncash information on lease

liabilities for obtaining the asset

• Weighted average remaining lease term
• Weighted average discount rate

Disclosures

• Maturity analysis separately for finance and
• perating leases

– Annual undiscounted cash flows for a minimum

• f five years

– Total amount due for remaining years – Reconciliation of undiscounted cash flows to lease liabilities in the statement of position

Disclosures

• Related party lease transactions

Disclosures

• Disclose the election to expense short-term leases

– If the expense does not reasonably reflect the commitments, then disclose the fact and the short-term commitments

• Disclose the election not to separate

nonlease components – Include the classes elected

Video

• It’s time for another one of my strange videos. We

like to parody movies and other pop culture and, at the time we were producing this webcast, the hot movie coming out was Batman Versus Superman.

• Well, we wanted to take that basic thought and run

it back to that 1960’s TV show of which I am sure most of you are aware. Throw in some accounting for leases and we’re ready to go.

• So sit back, relax and enjoy our own accounting

superheroes: “GAAPman and Ribbon.”

• Hey! I got my own window cameo. If you’re too

young to get that reference, ask someone in your office.

• In any case, it is time to move on and finish up

this course.

Lessor

Overview

• Most accounting is unchanged from

prior guidance

• Three types of leases

– Sales type – Direct financing – Operating

Sales Type Lease

• At commencement date, recognize the following

– Net investment in the lease – Selling profit or loss from the lease – Initial direct costs

• If the fair value of the asset differs from the

carrying amount, then expense

• If not, then include in the

investment of the lease

Sales Type Lease

• Subsequently, recognize the following

– Interest income on the lease investment – Variable payments not in the investment – Impairment, if any

Direct Financing Lease

• At commencement date, recognize the following

– Net investment in the lease – Selling loss, if applicable – Derecognize the asset

• Note that profit and initial direct costs are deferred

Direct Financing Lease

• Subsequently, recognize the following

– Interest income on the lease investment – Variable payments not in the investment – Impairment, if any

Operating Lease

• At commencement date, defer the initial

direct costs

Operating Lease

• Subsequently, recognize the following

– Lease payments in income on a straight line basis, unless something else is more reasonable – Variable payments not in the investment – Initial direct costs over the lease term

Disclosures

Disclosures

• Disclosures for the lessor will be many of the

same ones concerning the lease in general as for the lessee – In addition there are some more specific to the lessor

Disclosures

• A table showing

– For sales-type and direct financing

• Profit or loss at the commencement date
• Interest income

– For operating

• Lease income for lease payments

– For all

• Variable lease payments

not in the lease receivable

Disclosures

• Components of its aggregate net lease investment

– Carrying amount – Unguaranteed residual values – Any deferred selling profit on direct financing leases

Disclosures

• Disclosures about risk management

– Risk management strategy – Carrying amount of residual assets covered by residual value guarantees – Any other ways residual risk is reduced

• Buyback agreements
• Variable lease payments

for excess of limits

Disclosures

• For sale-type and direct financing leases

– Significant changes the balance of unguaranteed residual assets and deferred selling profits for direct financing leases – Maturity analysis for the lease receivables for a minimum if five years with a total for remaining – Reconciliation of undiscounted cash flows to the lease receivables

Disclosures

• For operating leases

– Maturity analysis of lease payments separate from the sale-type and direct financing leases – Disclosures about the underlying assets required by Topic 360

Sales Leaseback Transactions

Sales Leaseback Transactions

• For a transaction to qualify as a sales leaseback,

the transfer must be considered a sale under the revenue recognition standards – An entity must satisfy a performance obligation by transferring control of the asset

Sales Leaseback Transactions

• The leaseback, by itself, does not prevent the

lessor/buyer from obtaining control

• The lessor/buyer has not obtained control if the

lease is considered a finance or a sale-type lease

Sales Leaseback Transactions

• The transfer would not be sale if the lessee has an
• ption to repurchase the asset unless both of the

following apply – Exercise price is the asset fair value at the exercise time – Substantially the same, alternative assets are readily available in the market

Sales Leaseback Transactions

• Transfers qualifying as a sale

– Lessee/seller

• Recognizes the transaction price for the sale

when the lessor obtains control

• Derecognizes the asset
• Follows the lessee lease guidance

– Lessor/buyer

• Follows GAAP guidance

for a purchase and then follows the lessor lease guidance

Sales Leaseback Transactions

• Transfers NOT qualifying as a sale

– Lessee/seller

• Keep the asset on the books
• Account for the amount received as a

financial liability – Lessor/buyer

• Not recognize the asset
• Account for amounts paid

as a receivable

Leveraged Leases

Leveraged Leases

• This model found in prior guidance will only apply

to leases that commenced prior to the effective date

• The model will not be used for any leveraged

leases commencing after the effective

Conclusion

Conclusion

• While this marks a major change in the

accounting for leases, it is not as drastic as

• riginally envisioned

Conclusion

• The final goal was to provide better transparency

through two major conventions – Disclosing the assets and liabilities arising from a lease on the balance sheet for substantially all leases – Providing better disclosures about the lease contracts

Conclusion

• Remember to use professional judgment with

regard to all aspects, including materiality