A New Lease on Life: Forthcoming Changes in Accounting and Financial Reporting for Leases

Transcription

1 A New Lease on Life: Forthcoming Changes in Accounting and Financial Reporting for Leases Sunday, May 31, :30 2:20 1 CPE Moderator: Speakers: - Terry Stone, CFO, Henrico Public Schools - David A. Vaudt, CPA, Chairman, GASB - Dave Bean, CPA, Director of Research and Technical Activities, GASB - Melanie Seale, CPA, Assistant Director of Finance, City of San Antonio

2 A New Lease on Life: Forthcoming Changes in Accounting and Financial Reporting for Leases The views expressed in this presentation are those of Chairman Vaudt and Mr. Bean. Official positions of the GASB on accounting matters are determined only after extensive due process and deliberation. 2

3 Opportunities for Stakeholder Involvement on the Leases Project Task Force First due process document Preliminary Views: - Comment letters - Public Hearings Second due process document Exposure Draft: - Comment letters - Possible 2 nd set of Public Hearings 3

4 Task Force for Projects Resulting in Standards Members appointed by the Chair: - After consultation with Board members and GASAC Chair Composition for a projects leading to Statements: - 5 Preparers - 3 Auditors - 5 Users Task Force met with Board on January 23,

5 Comment Letters and Public Hearings on Preliminary Views 37 comment letters received - GFOA response by Committee on Accounting, Auditing, and Financial Reporting - State GFOA responses: Colorado, Florida, Illinois, Michigan, and Texas 3 Public Hearings held New York, Texas & California: - GFOA testified - State GFOA s testified Florida and Texas 5

6 Your Next Opportunity to Participate! Exposure Draft in 2016 We would love to hear from you on this next due process document on leases. Remember: The only ideas that are off the table are the ones you don t share with us. So, make sure your ideas are on the table. 6

7 Accounting and Financial Reporting for Leases What: The GASB has proposed revisions to existing standards on lease accounting and financial reporting (primarily NCGA Statement 5 and GASB Statement 13) Why: The existing standards have been in effect for decades without review to determine if they remain appropriate and continue to result in useful information; FASB and IASB have been conducting a joint project to update their lease standards When: Preliminary Views issued for public comment in November 2014; comment deadline was March 6,

8 Scope and Applicability Any contract that meets the definition of a lease Follow definition, not label Excludes Contracts that transfer ownership and do not contain termination options (financed purchases) Leases with bargain purchase option (financed purchases) Other exclusions: - Intangible assets - Service concession arrangements (Statement 60) Applies to lessees and lessors 8

9 Lease Definition A lease is a contract that conveys the right to use a nonfinancial asset (the underlying asset) for a period of time in an exchange or exchange-like transaction. Contract indicates it is legally enforceable Nonfinancial asset, rather than capital asset, allows for the possibility that another type of asset could be subject to a lease - But excludes securities lending and other transactions involving financial assets Exchange excludes agreements with nominal payments 9

10 Lease Term Definition The period during which a lessee has a noncancellable right to use an underlying asset (referred to as the noncancellable period), plus the following, if applicable: a. Periods covered by a lessee s option to extend the lease if it is probable, based on all relevant factors, that the lessee will exercise that option b. Periods covered by a lessee s option to terminate the lease if it is probable, based on all relevant factors, that the lessee will not exercise that option. Noncancellable period is time during which lessee is legally obligated to make payments to lessor Probable defined as in Statement 62: likely to occur 10

11 Foundational Principle All leases are financings of the right to use an underlying asset Therefore, single approach applied to accounting for all leases Approach less complex than the current model: - Lessees classify leases as capital or operating - Lessors classify leases as sales-type, direct financing, or operating Exception to single approach Short-term leases 11

12 Initial Reporting Assets Liability Deferred Inflow Lessee Intangible asset (right to use leased asset) Lessor Lease receivable Continue to report leased asset Present value of future lease payments NA NA Equal to lease receivable plus any cash received up front 12

13 Subsequent Reporting Lessee Lessor Assets Liability Deferred Inflow Amortize over shorter of useful life or lease term Depreciate leased asset (unless indefinite life or required to be returned in its original or enhanced condition) Reduce receivable by lease payments (less payment needed to cover accrued interest) Amortize discount over term of the receivable Reduce by lease payments (less amount of interest expense) NA NA Recognize revenue over the lease term on a systematic and rational basis 13

14 Exception for Short-Term Leases 14

15 Definition of Short- Term Leases At beginning of lease, maximum possible term under the contract is 12 months or less - Include any options to extend, regardless of the probability of extension - For leases cancellable by either party, the maximum possible term is the noncancellable period, including any notice periods Leases that transfer ownership are not in scope of PV and, therefore, do not qualify for the short-term lease exception, even if they meet the other criteria 15

16 Reporting Short- Term Leases Lessees - Lease payments recognized as expenses/expenditures based on the terms of the contract Do not recognize assets or liabilities associated with the right to use the underlying asset for shortterm leases - Disclose short-term leases expense/expenditure recognized during the reporting period Lessors - Lease payments recognized as revenue based on the terms of the contract Do not recognize receivables or deferred inflows associated with the lease - No disclosure requirements 16

17 Other Provisions 17

18 Leases with Multiple Components Separately account for lease and service components Separately account for individual lease components when Lease terms differ Underlying assets are in different classes for disclosure Practicality exception provided based on facts and circumstances See flowchart for allocation guidance 18

19 Leases with Multiple Components Does the contract have individual prices? No Are there observable stand- alone prices for each component? No Are there observable stand- alone prices for any component? No Account for contract as a single lease. Yes Yes Yes Are the prices reasonable based on other observable stand- alone prices? No (or do not know) Allocate using relative stand- alone prices. Allocate stand- alone price and account for remaining components as a Yes Use contract prices. 19

20 Project Timeline Pre-Agenda Research Started April 2011 Added to Current Technical Agenda April 2013 Preliminary Views Approved November 2014 Exposure Draft Expected January 2016 Final Statement Expected November

21 CITY OF SAN ANTONIO, TEXAS (COSA) 21

22 COSA S PRELIMINARY REVIEW ON LEASES Concerns/Questions - Consistency among depts on lease terms - Leases among component units - Total accounting for lease revenue - Considerations with P3s - Consideration of threshold for capitalization (consistency with intangibles) - Disclosure/Accounting for subleases & lease-leaseback Anticipated Change in Work Process - Working with vendors to split lease from service - Reach out to depts for triggering events annually for re-evaluation of lease - Reach out to Component Units to ensure leases are identified between all parties 22

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