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 or 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 operating 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 of 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 of 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 operating leases should be presented separately from each other as well as from other assets – Lease liabilities for finance leases and operating leases should be presented separately from each other as well as from other 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 operating right of use assets in the same line item – You are NOT allowed to present finance and operating 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 other 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 operating leases – Annual undiscounted cash flows for a minimum of 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
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