Update on Lease Accounting

Transcription

1 Update on Lease Accounting

2 Presenters Kelvin Tetz, Partner Moss Adams LLP Real Estate Group Charlie Shannon, Partner Moss Adams LLP Financial Services Group

3 Disclaimer The views expressed in this presentation are our own and do not represent the positions of Moss Adams LLP. 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.

4 Topics Overview FASB Approach IASB Approach Major elements of the model Looking ahead

5 Why do we have a Leases Project? Lessee Most lease assets and liabilities are off balance sheet Limited information about operating leases Lessor Lack of transparency about residual values Consistency with lessee proposal and revenue recognition proposal $1.25 trillion Of off balance sheet operating lease commitments for SEC registrants* * Estimate according to the 2005 SEC report on offbalance sheet activities

6 What is Lease Accounting all About?

7 Lessor and Lessee Accounting (FASB) Leveraged lease accounting grandfathered

8 Lessor and Lessee Accounting (IASB)

9 Scope The new on off switch A contract that conveys the right to use an asset (the underlying asset) for a period of time in exchange for consideration Is the asset: Specified Under lessee s control Not readily substitutable

10 Basic Characteristics Balance sheet recognition of leases by lessees Short term lease exemption Measurement of lease assets and liabilities Present value of future lease payments Variable and most optional payments excluded Portfolio application permitted

11 Evaluating Lease term Lease term is the noncancelable period together with renewal and termination options that the lessee is reasonably certain to exercise (or not). Reasonably certain should include all contract, asset, entity and market based factors such as: Bargain purchase options Amount of payments for termination or nonrenewal Contingent payments Significant customization, installation costs, relocation costs Importance of leased asset to lessee Sublease lease terms

12 Classification Type A if it meets one of the following: Lease transfers ownership of the underlying asset by end of term Lessee is reasonably certain to exercise a purchase option Lease transfers all of the risk and rewards of ownership when considering the following: Lease term is for a major part of the remaining economic life of the asset For lessors sum of present value of lease payments plus residual value guarantee amounts to substantially all of the fair value of the underlying asset; For lessees sum of present value of lease payments plus residual value guaranteed by the lessee amounts to substantially all of the fair value of the underlying asset; Leased asset is specialized in nature, and not expected to have alternative use at end of term

13 Lessee Accounting Overview Balance Sheet Income Statement Cash Flow Statement Type A Right of use asset Lease liability Amortization expense Interest expense Cash paid for principal and interest payments included in financing Type B Right of use asset Lease liability Single lease expense on a straight line basis Cash paid for lease payments included in operating

14 Leases with Service Elements

15 Other Differences from Today

16 Timing There will be a final standard really! Discussion Paper Exposure Draft Second Exposure Draft Final Standard March 2009 August 2010 May 16, 2013 Late 2015? Effective Date Effective date: TBD (not likely before 2018) Years Presented for SEC Registrant Financial Statements FY 2017 FY 2015, FY 2016, FY 2017 FY 2018 FY 2016, FY 2017, FY 2018

17 Looking Ahead Transition Modified retrospective approach Proposed standard eliminates real estate specific guidance Implementation Challenges Information Systems Processes and controls Financial reporting Education & training Changes to financial ratios and metrics GASB Preliminary Views

18 Recent Accounting Standards Updates ASU , Liabilities (Topic 405) ASU , Investment Companies (Topic 946) ASU , Presentation of Financial Statements (Topic 205) and Property, Plant, and Equipment (Topic 360) ASU , Revenue from Contracts with Customers (Topic 606) ASU No , Consolidation (Topic 810): Amendments to the Consolidation Analysis

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