Leasing

WHY DO WE NEED A NEW STANDARD ON LEASING?

The FASB undertook the leases project to address the widespread criticism that the current accounting for lease transactions (most are off-balance sheet) does not represent the economics of all leases.

Leasing is an important activity for many organizations—whether a public or private company, or a not-for-profit organization. It is a means of gaining access to assets, obtaining financing, and reducing an organization’s exposure to the risks of asset ownership. Many organizations lease assets such as real estate, airplanes, trucks, ships, and construction and manufacturing equipment. Because of the prevalence of leasing, it is important for users of financial statements to have a complete and understandable picture of an organization’s leasing activities.

The SEC staff in 2005 identified leasing as a form of off-balance sheet accounting that needed to be addressed. The FASB and the International Accounting Standards Board (IASB) have since been working together to improve and converge the accounting for lease rights and obligations.

On May 16, 2013, the FASB and the IASB issued Proposed Accounting Standards Update, Leases (Topic 842)—A revision of the 2010 Proposed FASB Accounting Standards Update, Leases (Topic 840), which creates a new approach to lease accounting that would require assets and liabilities arising from leases to be recognized on the balance sheet.

Stakeholders are asked to review and provide comments on the proposal by September 13, 2013.
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HOW WOULD THE NEW STANDARD CHANGE CURRENT U.S. GAAP?

Under current U.S. Generally Accepted Accounting Principles (U.S. GAAP), an organization applies a classification test to determine the accounting for the arrangement. For example:
  • Some leases are classified as capital leases (for example, a lease of equipment for nearly all of its life) whereby the lessee would recognize lease assets and liabilities on the balance sheet.
  •  Other leases are classified as operating leases (for example, a lease of new office space for 10 years) whereby the lessee would not recognize lease assets or liabilities on the balance sheet.
When assets and liabilities for leases are not recognized on the balance sheet, most users of financial statements make adjustments to the financial statements (using disclosures and other available information) to estimate the effects of leases on a lessee’s financial statements.

The new standards would increase transparency and comparability among organizations that lease assets, by recognizing assets and liabilities that arise from lease transactions.
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CORE PRINCIPLES

The core principle of the proposed requirements is that an organization should recognize assets and liabilities arising from a lease for leases with a maximum possible term of more than 12 months. This represents an improvement over existing leases standards, which do not require lease assets and lease liabilities to be recognized by many lessees.

The recognition, measurement, and presentation of expenses and cash flows arising from a lease by a lessee would depend primarily on whether the lessee is expected to consume more than an insignificant portion of the economic benefits embedded in the underlying asset. For practical purposes, this assessment would often depend on the nature of the underlying asset.
  • For most leases of assets other than property (for example, equipment, aircrafts, cars, trucks), a lessee would do the following:
    • Recognize a right-of-use asset and a lease liability, initially measured at the present value of lease payments
    • Recognize and present the interest on the lease liability separately from the amortization of the right-of-use asset.
  • For most leases of property (for example, land and/or a building or a part of a building), a lessee would do the following:
    • Recognize a right-of-use asset and a lease liability, initially measured at the present value of lease payments
    • Recognize a single lease cost, combining the interest on the lease liability with the amortization of the right-of-use asset, on a straight-line basis.
An organization would provide disclosures to enable users of financial statements to understand the amount, timing, and uncertainty of cash flows arising from leases.

The Boards also decided that, similar to lessee accounting, the accounting for a lessor would depend on the degree of consumption of the underlying leased asset. The criteria used to distinguish between the two types of leases are the same as the criteria for lessees. For practical purposes, this assessment would often depend on the nature of the underlying asset.
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WHAT DOCUMENTS HAVE BEEN ISSUED TO DATE?


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What Are the Next Steps In the Process?

The FASB and the IASB began their redeliberations of the proposals included in the May 2013 Exposure Draft in their January 23, 2014 meeting. The objective of the meeting was to have an in-depth discussion of the following topics:
  • Lessor accounting model
  • Accounting for “Type A” leases by lessors
  • Lessee accounting model
  • Lessee small-ticket leases.
The Boards were not asked to make any decisions. The Boards directed the staff to perform further analysis on those topics for discussion at a future Board meeting.


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