The FASB and IASB issued a revised Leases exposure draft on May 16, 2013 (the "revised ED"). The proposal would fundamentally change the accounting for lease transactions and have significant business implications. Under the revised ED, lessee’s must record substantially all leases on the balance sheet. A dual model is proposed for lessee and lessor income statement recognition.
Key developments in Lease accounting
- Lessees would account for the income statement impact using either a financing lease model (Type A lease) or a straight-line lease model (Type B lease). Classification would be based on the nature of the leased asset and its presumed consumption.
- Lessees would apply a straight-line lease model to leases of “property” (i.e., land, buildings, and part of a building) unless the lease term is for a major part of the asset’s economic life or the present value of the fixed lease payments represents substantially all of the asset’s fair value.
- For most leases of property, a lessor would account for the lease under the straight line model and apply an approach similar to today’s operating lease model. That is, a lessor would do the following:
– Continue to recognize the underlying asset
– Recognize lease income over the lease term, typically on a straight-line basis.
- Lessees would apply a financing lease model to leases of “non-property” (i.e., assets other than land and buildings) unless the lease term is for an insignificant portion of the asset's economic life or the present value of the fixed lease payments is insignificant relative to the asset’s fair value. Therefore, most non-property leases are expected to result in an expense recognition pattern that would be “front loaded”. Amortization of the right-of-use asset and interest expense on the lease liability would be reported separately in the income statement and cash flow statement.
- For most leases of assets considered other than property, a lessor would account for the lease under the financing lease model and would do the following:
– Derecognize the underlying asset and recognize a right to receive lease payments (the lease receivable) and a residual asset (representing the rights the lessor retains relating to the underlying asset)
– Recognize the effect of the discount on both the lease receivable and the residual asset as interest income over the lease term
– Recognize any profit relating to the lease at the commencement date.
- The lease term would include optional extensions only if the lessee has a significant economic incentive to exercise them. Variable lease payments would be included in measuring the right to use asset and lease liability based on a rate or index at the commencement date, payments that represent disguised minimum lease payments, and portions of residual value guarantees that are expected to be paid; a “probability-weighted” approach would not apply. Contingent rents relating to future performance (e.g., sales) and dependent on usage (e.g., miles driven) would not be included when measuring lease assets and liabilities.
What's next for Lease accounting?
- The comment period ended on September 13, 2013 and the boards will soon begin redeliberations. A final standard is expected no earlier than 2014 with an effective date no earlier than 2017.
Corporate Governance SeriesThe Quarter close: Directors edition Q2 2014
6/26/14 | Center for Board Governance
The Q2 2014 edition focuses on five IPO reminders for boards, FASB's new guidance on discontinued operations, and the Venezuelan exchange rates.
Corporate Governance SeriesThe Quarter close: Directors edition Q1 2014
3/27/14 | Center for Board Governance
This quarterly publication is designed to keep directors informed about the latest accounting and financial reporting issues.
In briefIn brief: Leasing project deliberations settle some issues, but differences remain (No. 2014-04)
3/20/14 | Assurance services
The boards redeliberated but could not reach consensus on certain key issues with respect to the joint leasing project.
Quarter closeThe quarter close — First quarter 2014: Publication and new video perspectives
3/17/14 | Assurance services
This edition updates you on recent FASB, SEC and other regulatory and corporate governance topics. Learn what's new now, and what to look for in the near future. We invite you to download our Q1 publication and view our new video perspectives.
Private company reporterPrivate company reporter - PCC amends, re-approves final VIE alternative for common control leasing arrangements
1/31/14 | Assurance services
In January, the PCC revised, then re-approved an alternative offering private companies an exemption from applying the VIE consolidation model to certain arrangements
Setting the standardSetting the standard - January 2014
1/9/14 | Assurance services
Welcome to the latest edition of "Setting the standard." It includes the latest updates on the standard-setting activities of the FASB and IASB. Learn more inside.
Corporate Governance SeriesThe quarter close - Directors edition: A look at this quarter's financial reporting issues - Q4 2013
12/23/13 | Center for Board Governance
This quarterly publication is designed to keep directors informed about the latest accounting and financial reporting issues that impact board decisions and company policies.
Private company reporterPrivate company reporter - PCC approves alternative that exempts certain arrangements from VIE guidance
11/15/13 | Assurance services
The PCC approved a final standard that offers private companies an exemption from applying the VIE consolidation model to certain common control leasing arrangements.
- The Bit - What energy company executives need to know about the proposed lease accounting standards
10/22/13 | Energy & mining
US and international accounting standards setters are getting closer to completing their overhaul of lease accounting. They are taking this action in response to long-standing criticism that today’s financial statements do not adequately portray the economic substance of lease arrangements. This issue of PwC’s The Bit summarizes the proposed guidance and explains how it is likely to change key financial reporting metrics.
Point of viewPoint of view: Lease accounting - Enhancing the financial reporting model
10/8/13 | Assurance services
In this Point of view on the leasing proposal, we recommend an alternative approach, based on indicators of effective ownership, for income statement recognition.
Corporate Governance SeriesThe quarter close - Directors edition: A look at this quarter's financial reporting issues - Q3 2013
10/3/13 | Center for Board Governance
The Q3 2013 edition focuses on accounting and reporting issues for private companies that could impact public companies, statement of cash flows, entities under common control, contingencies, new vice-chairman at the FASB, PCAOB proposal on improving auditor reporting, and international developments on auditor rotation and retendering.
- Power and Utilities Alert 2013-9: An industry perspective on the lease accounting proposal
10/1/13 | Power & utilities
How did power and utility companies respond the to the FASB/IASB lease accounting proposal exposure draft? This Power and Utilities Alert highlights the key issues that the revised ED has raised.
- Retail & Consumer KnowledgeBrief: Technical and Quality Newsletter
10/1/13 | Retail & consumer
What are the technical and reporting issues impacting retail and consumer products companies? PwC's Retail & Consumer KnowledgeBrief provides insights and summaries on restructuring comment letter trends and disclosure reminders, data protection, conflict minerals, the Patient Protection and Affordable Care Act, and more.
WebcastLease accounting in the energy sector: Drilling down into what the proposed rule changes mean for you webcast - October 24, 2013
Energy & mining
The proposal by US and international accounting standard setters to overhaul lease accounting likely will have far-reaching impacts for most companies. Watch this installment of the Energy executive webcast series to learn about how the new proposal will impact the energy industry.
PwC comment letter (IASB)PwC comments on the FASB and IASB's revised exposure draft on leases
9/19/13 | Assurance services
We support the core principle that an entity should recognize assets and liabilities arising from a lease. Our letter also outlines specific recommendations that we would like the board to consider.
WebcastLeasing: Consensus remains elusive. What now? – October 9, 2013
This webcast analyzes the comment letter responses to the FASB and IASB's revised exposure draft on the new leasing proposal, and provides insights to help you think through the nuances that might lead to unexpected financial results.
- Spotlight Lease Accounting: Transformational Change
9/4/13 | Healthcare
Included in this brief are next steps organizations should consider as well as an FAQs section and key contacts you may reach out to for additional follow up.
Private company reporterPrivate company reporter - August 15, 2013
8/15/13 | Assurance services
On August 7, the FASB issued an exposure draft on the definition of a public business entity and endorsed the PCC proposal for VIE considerations of common control leases.
Private company reporterPrivate company reporter - July 16, 2013
7/25/13 | Assurance services
On July 16, the PCC proposed to the FASB an accounting alternative that would exempt nonpublic entities from applying certain variable interest entity guidance. This edition of Private company reporter provides further information on the proposed alternative, as well as highlights of other recent developments related to private company reporting.
Tax accounting insightsRevised exposure draft on leases may have significant tax accounting, state tax, and systems implications
7/25/13 | Tax accounting services
The FASB and the IASB issued a revised exposure draft on leases. Although the tax law regarding the treatment of leasing transactions remains unchanged, taxpayers should consider how the Exposure Draft will impact the computation of federal and state taxable income and deferred income tax assets and liabilities associated with their leases.
- The overhaul of lease accounting: Catalyst for change in corporate real estate
7/19/13 | Real estate
This PwC publication outlines financial reporting, economic, tax and regulatory issues which commercial real estate may face with the proposed new lease accounting model.
- Transformational change: Considering the impact of the proposed new lease accounting guidance on lessees in the rail industry
7/11/13 | Transportation and logistics
This spotlight paper considers the impact of the proposed new lease accounting guidance on lessees in the rail industry.
- Lease accounting in industrial manufacturing: Transformational change
6/27/13 | Industrial products
Proposed lease accounting changes will impact industrial manufacturing company financial and performance metrics such as EBITDA, net income, and cash flows from operations. Creating a catalog of all leasing arrangements will be help in evaluating the impact of the new standard.
- Lease accounting in retail and consumer products: Transformational change
6/25/13 | Retail & consumer
The changes to lease accounting proposed by the FASB and IASB will bring all leases onto the balance sheet and change income statement recognition, business processes, systems, and controls. Retail and consumer companies should prepare for the upcoming business process changes.
DatalineDataline: Leases – The Great Divide: The new leases landscape (No. 2013-13) and Supplement
6/13/13 | Assurance services
On May 16, 2013 FASB and IASB a revised exposure draft for Leases. A final standard is not expected before 2014, and is unlikely to be effective before 2017. This Dataline puts together the pieces to the puzzle of understanding the proposed model for lease accounting. Also included is a supplement that provides illustrative examples of applying the proposed model.
10Minutes10Minutes on lease accounting
6/4/13 | Assurance services
After three years of outreach and deliberation, the IASB and FASB recently issued a revised proposal to overhaul the rules on accounting for leases, a move that could significantly boost US companies' reported debt.
DatalineDataline: Accounting and disclosure implications of Hurricane Sandy (No. 2012-17)
11/12/12 | Assurance services
Hurricane Sandy is expected to be the second-costliest Atlantic hurricane in history, only surpassed by Hurricane Katrina in 2005. Many businesses were disrupted by Hurricane Sandy and its aftermath including the New York Stock Exchange, which was closed for two days. While not all-inclusive, this Dataline discusses several accounting and disclosure-related matters companies may encounter in dealing with the financial reporting implications of Hurricane Sandy.
VideoStandard-setting update: Leases and financial instruments
9/17/12 | Assurance services
Standard-setting update: Leases and financial instruments
DatalineDataline: Leases -- One size does not fit all: A summary of the boards' redeliberations (No. 2012-11)
9/17/12 | Assurance services
The FASB and IASB jointly issued the initial leases exposure draft in August 2010 (the "initial ED"). A majority of the over 800 comment letters received raised significant concerns about the proposals. Redeliberations began in January 2011 and were substantially completed in July 2012. A "revised ED" is planned for the end of November 2012 (although this may slip into early 2013), with a 120-day comment period. This Dataline looks at both the lessee and lessor proposed accounting models that will be included in the revised ED.