FASB-IASB Lease Project Update Interpreting latest revised proposal as conclusion nears

Transcription

1 FASB-IASB Lease Project Update Interpreting latest revised proposal as conclusion nears Wednesday, June 19th at 2PM EDT Dial-in Info: Conference ID Thanks for joining us! The webinar will begin shortly Intended use for participants at event

2 FASB-IASB Lease Project Update Interpreting latest revised proposal as conclusion nears Wednesday, June 19th at 2PM EDT Today s Speakers: Jeannine Flower Co-Chair GE Capital Lease Project GE Capital Ralph Petta Chief Operating Officer ELFA Intended use for participants at event

3 Disclaimer The views expressed in this presentation are our own and do not represent the positions of the General Electric Company or its Affiliates and Subsidiaries or ELFA. This summary material is based on publicly available information. Such information is subject to change without notice, may be incomplete or condensed. Except where otherwise indicated herein, the information provided herein is based on matters as they exist as of the date of preparation and will not be updated or otherwise revised to reflect information that subsequently becomes available. Nothing herein constitutes tax, accounting or legal advice to third parties. Any discussion of U.S. tax or accounting matters contained herein (including any attachment) is not intended or written to be used and cannot be used by any taxpayer for the purpose of avoiding U.S. tax-related penalties. If the discussion related to U.S. tax matters is used to promote, market, or recommend any transaction or investment, the discussion was written to support the promotion or marketing of the transaction or matters addressed and each taxpayer should seek advice based on the taxpayer s particular circumstances from an independent tax advisor. 3

4 Agenda Leasing: revised proposals ELFA perspectives Buzz on the streets 4

5 What aspect of leasing is set to change? Proposals change US GAAP/IFRS accounting rules only Bankruptcy law remains unchanged, risks and rewards of ownership model under Art. 2A UCC True lease vs Art. 9 UCC secured loan Note: Reporting entity s financial position will commingle arrangements extending from rentals through to lease-purchase financing obscuring users bankruptcy analysis Tax -True lease or Debt -Revenue Rulings and Court Cases -GE True Lease Guidelines Legal -Lease or Sale -UCC Article 2A -UCC Title Tax rules remain unchanged, risks and reward assessment of tax owner considering extent residual retained by lessor at end of lease Accounting - Current GAAP, either operating or capital/finance Note: Bigger book-tax differences; new complexity in sales/property tax 5

6 Project timeline Projected started in 2006 Issues included significant off balance sheet liabilities/structuring and perceived insufficient financial information for users FASB-IASB convergence effort; nearly identical set of accounting rules to replace SFAS 13/IAS 17 Comment period deadline on Sept 13, 2013; no further proposals contemplated May 2013 Revised proposals issued Sept (?) Comment period; Final Redeliberations Standard begin 2015/16 (?) Transition for comparatives 2017/18 (?) Effective Date 6

7 Transition Apply requirements to all leases in force Adjust equity at the beginning of the earliest comparative period presented Modified retrospective approach could be used as an alternative to a full retrospective approach For FASB ASC 840 capital/ias 17 finance leases, the lessee would be permitted to use the existing carrying amounts for lease-related assets and liabilities as the initial measurement Question If new accounting rules become effective on Jan 1, 2017 would the following contract be subject to these new rules? [Yes/no] - Operating lease contract originated on July 1, Lease Comment termination period; date is July 1, Lessee Redeliberations prepares financial statements that includes a three year comparative begin income statement (?) (?) 7

8 Leasing: revised proposals 8

9 FASB-IASB Lease project headlines Short-term leases with maximum term of 12 months or less permitted to remain off-balance sheet with straight-line expense over lease term All other leases recognized on balance sheet Definition of a lease is modified; an important change in scoping New lease classification introduced (Type A vs Type B) Captive sales-type lease model, similar to SFAS 13 finance lease model modified to permit residual asset accretion but retained manufacturer Day 1 gross profit recognition constraint (pro rata portion of asset leased) Sub-lease arrangements add further complexity; impact should not be underestimated Sales-leaseback arrangements require close attention 9

10 Lessee accounting model evolution Today As proposed Risk & Rewards Models Right of Use Model Operating lease rental Capital lease (*) Balance Sheet: Asset leased property under capital lease Liability Obligation under capital lease Asset Right of use asset ( ROU ) Liability Obligation to make lease payments P&L: Operating rental expense Front end financing expense (asset amortization+ interest expense on liability) P&L Type A lease Front end financing expense (asset amortization+ interest) P&L Type B lease Total level lease expense (insignificant consumption) * Referred to as finance lease under IAS 17 for lessee 10

11 Does arrangement contain a lease? Definition has not changed; meaning of control has changed Identified asset Can be explicit or implicit Right of substitution must be practical, economically feasible and without customer consent + Right to control the use Direct the use, ability to make decisions that significantly affect the benefits received Receive the economic benefits Does contract contain substantive substitution rights of lessor (no lessee consent)? Is the asset an inseparable or non-distinct part of the overall service? Customer receives substantially all of output but no ability to direct use? 11

12 Does the lease include multiple elements? Lease and non-lease (services, supplies, etc.) components required to be bifurcated - Lessors would allocate payments in accordance with revenue recognition standard (separate criteria). - Lessees would allocate consideration based on observable standalone prices residual method permitted Items that cannot be separated based on observable prices result in accounting as a single lease component Multiple lease elements may (or may not) need to be separated using primary asset concept (example: building with integral equipment) 12

13 Lease classification Lease classification impact on lessee and lessor accounting models: Lessee expense profile: Type A Interest expense (liability) - Plus - Amortization expense (ROU asset) Type B Straight-line lease expense, consisting of: - Interest expense on liability - Amortization expense, balancing figure Lessor accounting model: Akin to financing lease model (receivable with residual asset) Operating lease model (leased asset plus rental income) Lease classification performed at lease commencement only Principle based on consumption; application largely based on asset type Other-then-property: Apply Type A model unless lease term or lease payments are an insignificant portion of total economic life or asset fair value at lease inception, respectively, otherwise apply Type B model Property (land, building or part of building): Type A Apply Type B model unless lease term is for major part of remaining economic life or lease payments are substantially all of the asset FV at lease inception otherwise apply Type A model Source: PwC 13

14 Lease classification: Lessee profile Lessee Balance Sheet Profile Equipment / Type A ROU Asset Lease Liability Lessee Expense Profile Type A vs Type B Total Expense Profile Day 1 End Yr1 End Yr2 End Yr3 End Yr4 End Yr5 Type A - Equipment Type B - Property OR Property / Type B ROU Asset Lease Liability Day 1 End Y 1 End Y 2 End Y 3 End Y 4 End Y 5 All leases are capitalized Yr1 Yr2 Yr3 Yr4 Yr5 Lease liability accounting is the same for equipment leases and property leases ROU asset amortization is a balance figure for property leases driving a total straight-line lease cost compared to equipment leases with a higher cost in earlier period of lease Pre-tax income impact differs for equipment vs property leases Debt to Equity Ratio higher under proposed model EBITDA higher under proposed model 14

15 Measurement Lease Term Lease Payments Non-cancellable period Fixed payments less lease incentives Options that have a significant economic incentive(*) to exercise Purchase or termination options, if included in the lease term - Renewal options - Termination options - Purchase options currently below market rate - Significant leasehold improvements expected to have significant economic value when option to extent or terminate becomes exercisable Lease term dictates extent payments are capitalized Variable payments that are in-substance fixed payments Residual value guarantees (**) Index or rate-based spot rate Note: Contingent/performance-based payments expensed when incurred (*) Consider contract-based, asset-based, entity-based, and market-based factors including importance of underlying asset to the lessee s operations (**) For lessee, include amounts expected payable. For Lessor, include residual value guarantees if in-substance fixed payment 15

16 Leases other considerations Sale and leaseback transactions Sale and leaseback vs financing Consider proposed revenue recognition guidance Substantially all of the remaining benefits Sublease arrangements Two lease transactions Gross up presentation as lessee and lessor with differences in approach Type A vs Type B distinction Subtle differences on application of lessee vs lessor models 16

17 Recap: What lessee needs to consider for capitalization 1 Does arrangement contain a lease? (identified asset + right to control use) power & benefits criterion 2 If bundled contract, can non-lease component be bifurcated based on observable standalone price? 3 Drives P&L Determine lease classification (depends on leased asset, and lease term & PV payments analysis) 4 Measure asset/liability based on PV payments Determine lease term, include optional periods if significant economic incentive Estimate payments, rentals, guarantees and in-substance fixed payments contingent performancebased rentals excluded 5 Reassessment of certain items at each reporting date 17

18 ELFA Perspective 18

19 ELFA s Objectives ELFA Perspective Serve the interests of members/industry Maintain high ground positions: support capitalization Help get the accounting right by working with the Boards and staff - Provide industry information - Provide commentary on issues identified 19

20 Overview Concerns ELFA Perspective Right-of-use approach no improvement over current US GAAP: will not result in more decision-useful information Minor changes to current GAAP would have met the objective of capitalizing operating leases for analysts Unnecessary complexity Obscure true economic activity Introduce capitalization of executory contracts Increase implementation costs for lessees and lessors No real cost-benefit analysis conducted 20

21 Specific Concerns: Outstanding Issues Two lease classification ELFA Perspective --front-end loaded lease costs for equipment transactions --straight line for real estate leases Classification based on subjective criteria: how much of the leased item is consumed over the lease term Lessee accounting for sale leasebacks sale criteria unclear Lessee/lessor classification symmetry Leveraged lease method for lessors eliminated 21

22 ELFA Perspective ELFA is actively engaged in the project Monitoring progress Identifying and analyzing advocacy issues Influencing the outcome through - Meeting and Communicating with the Boards and staff - Coalitions with international leasing trade associations, real estate industry, and US Chamber of Commerce - Financial Accounting Committee and working group members - Meeting with SEC, OCA, Congress - Raising awareness of lessees, lessors, investor community - June 27 BNA/ELFA webinar - Comment letter 22

23 Buzz on the Street 23

24 Buzz on the Street Economic benefits of equipment leasing/financing remain cash flow match use benefit tax benefits risk management flexibility 100% financing But, INPUT is Critical!!!!! And, it Matters Comment deadline: September 13, 2013 Resources and comment letter guidance : 24

25 Questions? Jeannine Flower Co-Chair GE Capital Lease Project GE Capital Ralph Petta Chief Operating Officer ELFA Intended use for participants at event