The Year Was 8/8/2014

Transcription

1 FASB- Lease Accounting Re-Exposed Jeff Dieleman CPA The Year Was Moss Adams LLP Moss group Adams name LLP page page 1 1 The Year Was The Dow Jones closed at 1,004 A gallon of gas was $.76 The Apple Computer Company was formed The cost of a Superbowl ad was $110, Moss Adams LLP Moss group Adams name LLP page page 2 2 1

2 Popular Musicians and songs Barry Manilow Diana Ross Paul Simon Paul McCartney and Wings Elton John Rod Stewart Queen ABBA The Year Was Moss Adams LLP Moss group Adams name LLP page page 3 3 The Year Was Gerald Ford was the President of the United States Moss Adams LLP Moss group Adams name LLP page page 4 4 The Year Was And perhaps most notably FAS 13- Accounting for Leases was Issued Moss Adams LLP Moss group Adams name LLP page page 5 5 2

3 The Year Was 1976 Moss Adams LLP Moss group Adams name LLP page page 6 6 Agenda Project Rationale Project Chronology Current Authority FASB Moss Adams LLP Moss group Adams name LLP page page 7 7 Project Rationale SEC research shows $ 1.25 trillion in non cancelable future cash flows being reported in footnotes of US public companies. Leases being accounted for as Operating leases may amount to several trillion $$ worldwide. Moss Adams LLP Moss group Adams name LLP page page 8 8 3

4 Project Rationale Current guidance for leases probably does not align with definitions of assets and liabilities under conceptual frameworks for the FASB. Financial statement users (investors, lenders, rating agencies) areadjustingadjusting statements for operating leases. Leases are being structured to meet a predetermined accounting result. Lease accounting issues provide an opportunity for convergence. Moss Adams LLP Moss group Adams name LLP page page 9 9 Project Rationale Conceptual Questions: Does the lessee s right to use the leased item meet the definition of an asset? Concepts statement No. 3: Assets are probable future economic benefits obtained or controlled by a particular entity as a result of past transactions or events. An asset has three essential characteristics: (a) it embodies a probable future benefit that involves a capacity, singly or in combination with other assets, to contribute directly or indirectly to future net cash inflows, (b) a particular enterprise can obtain the benefit and control other s access to it, and (c) the transaction or other event giving rise to the enterprise s right to or control of the benefit has already occurred. Moss Adams LLP Moss group Adams name LLP page page Conceptual Questions: Project Rationale Does the lessee s obligation to make payments under the lease represent a liability? Liabilities are probable future sacrifices of economic benefits arising from present obligations of a particular entity to transfer assets or provide services to other entities in the future as a result of pas transactions or events. A liability has three essential characteristics: a) it embodies a present duty or responsibility to one or more other entities that entails settlement by probable future transfer or use of assets at a specified or determinable date, on occurrence of a specified event, or on demand, b) the duty or responsibility obligates a particular enterprise, leaving it little or no discretion to avoid the future sacrifice, and c) the transaction or other event obligating the enterprise has already happened. Moss Adams LLP Moss group Adams name LLP page page

5 Project Chronology June 2005 SEC report on off balance sheet financial accounting implications provided impetus for the project. April 2006 Project added to joint FASB / IASB agenda at joint meeting in London. February 2007 First meeting of Joint Working Group on Lease Accounting in London. Moss Adams LLP Moss group Adams name LLP page page Current Accounting Developments Leases: Timeline Moss Adams LLP Moss group Adams name LLP page page Let s Rewind Moss Adams LLP Moss group Adams name LLP page page

6 Current Authority (Pre Codification) FASB Statement No. 13 Accounting for Leases Issued November FAS 27 Renewals or Extensions of existing or Direct Financing Leases an amendment to FAS 13 FAS 28 Accounting for Sales with Leasebacks an amendment to FAS 13 FAS 29 Determining Contingent Rentals an amendment to FAS 13 FAS 98 Accounting for Leases Sale Leasebacks Moss Adams LLP Moss group Adams name LLP page page Current Authority FASB Statement No. 13 Issued in 1976 Established standards of financial accounting for leases by lessees and lessors. For lessees, a lease is a financing transaction called a capital lease if it meets any one of four specified criteria; if not, it is an operating lease. Moss Adams LLP Moss group Adams name LLP page page Current Authority FASB Statement No. 13 Four Criteria for Financing Lease treatment Transfer of ownership to lessee at end of lease term. Lease contains a bargain purchase option. Lease term equal to or greater than 75% of estimated economic life of leased property. Present value of lease payments equals or exceeds 90% of fair value of leased property. Moss Adams LLP Moss group Adams name LLP page page

7 Let s Fastforward Moss Adams LLP Moss group Adams name LLP page page Moss Adams LLP Moss group Adams name LLP page page Scope exceptions The proposed guidance would apply to all leases other than the following: Leases of intangibleassetsassets Leases to explore for or use minerals, oil, natural gas, and similar non regenerative resources Leases of biological assets Short term leases Moss Adams LLP Moss group Adams name LLP page page

8 Definition of a lease defined a lease as a contract in which the right to use a specified asset (the underlying asset) is conveyed, for a period of time, in exchange for consideration. Moss Adams LLP Moss group Adams name LLP page page Overview of Proposed Accounting Models Lessee Lessee Right of Use Model Practical Expedient: Equipment leases are accelerated (Type A) Balance Sheet Recognize right of use asset Recognize liability to make estimated future lease payments Land/Building leases are straight line (Type B) Income Statement Interest & Amortization (I&A) Method (most equipment leases) Single Lease Expense (SLE) Method (most real estate leases) TYPE A TYPE B (Lessee) Under the proposed model, a lessee would recognize a right of use asset representing its ability to use the leased asset for the lease term, and a corresponding liability for its obligation to pay rentals. The initial measurement of the lease liability would be at the present value of the lease payments, discounted using the lessee s incremental borrowing rate or the interest rate implicit in the lease. Moss Adams LLP Moss group Adams name LLP page page

9 Expense Recognition Lessee Type A Accelerated (AKA Interest & Amortization Method)in cases for which the lessee acquires and consumes more than an insignificant portion of the underlying asset over the lease term. Amortize the right of use asset on a systematic basis (generally straight line) Interest expense would be calculated on the effective interest method Combined amortization expense & interest expense results in front loaded pattern of total lease expense Recognize amortization expense & interest expense separately in the income statement Moss Adams LLP Moss group Adams name LLP page page Moss Adams LLP Moss group Adams name LLP page page Type A Expense Recognition Lessee Moss Adams LLP Moss group Adams name LLP page page

10 Expense Recognition lessee Type B Straight line (AKA SLE)in cases where the lessee acquires and consumes an insignificant portion of the underlying asset over the lease term Interest expense calculated under the effective interest method Measure the right of use asset each period as a balance figure such that total lease expense would be recognized on a straight line basis. Recognize lease expense as one amount in the income statement. Moss Adams LLP Moss group Adams name LLP page page Moss Adams LLP Moss group Adams name LLP page page Lease Term The lease term is the non cancellable period for which the lessee has contracted with the lessor to lease the underlying asset, together with any options to extend or terminate the lease when there is a significant economic incentive for an entity to exercise an option to extend the lease, or for an entity not to exercise an option to terminate the lease A lessee should reassess the lease term only when there is a significant change in relevant factors such that the lessee would then either have, or no longer have, a significant economic incentive to exercise any options to extend or terminate the lease. Similar to existing GAAP Moss Adams LLP Moss group Adams name LLP page page

11 (Measurement) Includes fixed lease payments Variable lease payments that depend on an index or a rate (such as the Consumer Price Index or a market interest rate) Excludes other variable lease payments unless those payments are in substance fixed payments. Moss Adams LLP Moss group Adams name LLP page page (Lessee) Contracts with service components If a contract contains a lease, but also contains a service component, the distinct service components would be accounted for in accordance with other GAAP). Moss Adams LLP Moss group Adams name LLP page page Proposed Disclosures Must disclose Type A and Type B ROU assets separately on the balance sheet and disclose the line item where located Must disclose Type A and Type B liabilities separately on the balance sheet and disclose the line item where located Type A = Amortization & Interest expense on the P/L Type B = Lease Expense on the P/L Moss Adams LLP Moss group Adams name LLP page page

12 Proposed Disclosures The maturity analysis should show, at a minimum, the undiscounted cash flows to be paid in each of the first five years after the reporting date and a total of the amounts for the years thereafter. Short Term Leases required to disclose the amount of expense and any other qualitative disclosures. Moss Adams LLP Moss group Adams name LLP page page Proposed Disclosures Lessors Information about the nature of its leases, as well as information about significant assumptions and judgments made in applying the leases requirements; A table of lease income during the reporting period; and A maturity analysis of the undiscounted cash flows that comprise the lessor s lease receivables for each of the first 5 years following the reporting date (and a total for thereafter) Moss Adams LLP Moss group Adams name LLP page page Cash Flow Presentation Cash payments for the principal portion of the lease liability arising from Type A leases within financing activities Cash payments for the Interest portion of the lease liability arising from Type A leases within operating activities Cash payments arising from Type B leases within operating activities. Moss Adams LLP Moss group Adams name LLP page page

13 Key Impacts For the lessee other than some short term leases, all leases will be on the balance sheet Changes to both B/S and I/S Could impact key ratios and covenant calculations Accelerated expense recognition Moss Adams LLP Moss group Adams name LLP page page Lessor Accounting Two Models for the Balance Sheet and Income Statement 1. Receivable Residual Approach (Type A) Used for most equipment leases Record a lease receivable for the right to receive payments at the present value of the lease payments Derecognize the underlying asset Profit recognition Gain or loss on the transfer of the right to use asset calculated as the difference between the present value of the lease payments to be received and the carrying value allocated to the right to use asset sold Interest income and profit from the accretion of the residual asset recognized over the lease term Moss Adams LLP Moss group Adams name LLP page page Lessor Accounting Two Models for the Balance Sheet and Income Statement 2. Operating Lease Approach (Type B) Most land and building leases Lessor would keep property, plant & equipment on balance sheet Rental income would be recognized over the lease term on the straight line basis Moss Adams LLP Moss group Adams name LLP page page

14 Transition Likely to be effective no earlier than Jan 1, 2017 Companies will be required to restate comparative periods. All existing operating leases will need to be reevaluated to comply with new standard Existing Capital leases do not need to be reevaluated. Moss Adams LLP Moss group Adams name LLP page page Update The Boards will continue re deliberations of the EDs during the second half of 2014 and expect to discuss the following issues: Sale and lease back transactions; Small ticket leases; Disclosures; Leveraged leases (FASB only); Private company and not for profit issues (FASB only); Moss Adams LLP Moss group Adams name LLP page page Update Chairman of the FASB suggested the standard would not be issued until the latter half of Moss Adams LLP Moss group Adams name LLP page page

15 THANK YOU Moss Adams LLP Moss group Adams name LLP page page