The FASB and IASB (the "boards") 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.
- 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.
- 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.
Quarter closeThe quarter close — Fourth quarter 2013: Publication and new video perspectives
12/10/13 | 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 Q4 publication and view our new video perspectives.
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 SeriesBoardroomDirect: Update on current board issues - September 2013
10/3/13 | Center for Board Governance
This issue of BoardroomDirect® breaks down the results of PwC’s 2013 Annual Corporate Directors Survey in the backdrop of an evolving landscape, reports on the SEC’s newly proposed CEO pay ratio rules, describes the decision by ISS to include director tenure in its 2013-2014 investor survey, and gives the latest on the FASB/IASB lease accounting proposal.
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.
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.
- 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.
- 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.
Setting the standardSetting the standard - September 2013
9/25/13 | 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.
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.
Quarter closeThe quarter close — Third quarter 2013: Publication and new video perspectives
9/17/13 | 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 Q3 publication and view our new video perspectives.
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.
Setting the standardSetting the standard -- What you need to know about the FASB's and IASB's standard setting activities -- June 2013
6/27/13 | Assurance services
This edition includes the latest information on the standard-setting activities of the FASB and IASB. Learn about key accounting and reporting changes being considered.
- 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.
Quarter closeThe quarter close — Second quarter 2013: Publication and new video perspectives
6/18/13 | 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 Q2 publication and view our new video perspectives.
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.
In briefIn brief: FASB and IASB publish revised exposure draft on leases (No. 2013-26)
5/16/13 | Assurance services
The FASB and IASB issued a revised exposure draft on leases on May 16, 2013 with a comment period ending September 13, 2013. Almost all entities will be impacted. This In brief article provides an overview of the revised proposal.
WebcastLeasing webcast: Impacts and Action Items – June 11, 2013
Addressing the proposed changes to lease accounting will be a challenge for most companies. This webcast discusses how management can prepare for the changes in a measured way and some of the actions that companies are taking now to prepare.
WebcastLeasing webcast: Overview of the Proposed Guidance – May 29, 2013
Almost three years have passed since the IASB and FASB (the “Boards”) issued their initial proposal. After extensive outreach and re-deliberation, the Boards will be issuing a new proposal. This webcast discusses an overview of the proposed guidance and the nuances that might lead to unexpected financial results.
In briefIn brief: Lease accounting proposal expected by mid-May 2013; alternative views expressed (No. 2013-19)
4/11/13 | Assurance services
The FASB met on April 10, 2013 to discuss the costs, benefits, and complexity associated with the proposed lease accounting rules. The FASB members expressed their individual points of view and voted 4 to 3 in favor of moving forward with the revised exposure draft. The FASB and IASB expect to issue a joint exposure draft in mid-May 2013. This In brief article provides an overview of the decisions reached at the FASB meeting.
Setting the standardSetting the standard -- What you need to know about the FASB's and IASB's standard setting activities -- March 2013
3/25/13 | Assurance services
Our Q1-2013 edition provides updates on the latest developments in revenue recognition, classification and measurement of financial instruments, impairment of financial assets, leases, insurance contracts, and more.
Quarter closeThe quarter close — First quarter 2013: Publication and new video perspectives
3/18/13 | Assurance services
This edition of The quarter close highlights current developments in financial reporting, including key standard-setting developments in revenue, financial instruments, and other hot topics, as well as SEC and PCAOB regulatory updates.
Quarter closeThe quarter close — Fourth quarter 2012: Publication and new video perspectives
12/12/12 | Assurance services
This edition of The quarter close has the latest updates and timely reminders to help you navigate your year-end reporting process with a number of hot topics, including fair value, asset impairments, pensions, valuation allowances, and more.
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.
Quarter closeThe quarter close — Third quarter 2012: Publication and new video perspectives now available
9/17/12 | Assurance services
This edition of The quarter close highlights the SEC report on IFRS, the latest on conflict minerals, health care reform, and several FASB releases that are sure to keep you busy this fall. Video perspectives are also now available.
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.
PodcastPodcast: Build to suit lease
The first quarter 2012 'Current Accounting and Reporting Developments' webcast on March 21, 2012 included a discussion on build to suit leases, led by Chad Soares. This segment of the webcast is now available for podcast download.
DatalineDataline: Leasing -- Redeliberations of the leasing project -- Some new twists (No. 2011-21)
5/6/11 | Assurance services
This Dataline discusses the redeliberation decisions reached on the FASB and IASB's joint leasing project during the board meetings in January 2011 through April 2011. We also include PwC observations on the potential implications as well as examples on the application of the boards' tentative decisions.
DatalineDataline: Accounting and disclosure implications of the earthquake in Japan and related events (No. 2011-17)
3/28/11 | Assurance services
On March 11, 2011, an earthquake struck off the northeast coast of Japan, triggering a tsunami. The power supply in certain parts of Japan has been cut-off with rolling blackouts scheduled in other areas. Further compounding the situation, nuclear power plants were damaged causing worries about the possible meltdown of nuclear reactors and the release of harmful radioactive materials. While not all-inclusive of the types of issues that may be created by these events, this Dataline discusses several accounting and disclosure-related matters companies may encounter in dealing with the financial reporting implications of these tragic events.
DatalineDataline: Leasing -- FASB and IASB agree on changes that will reduce complexity of the proposed leasing standard (No. 2011-11)
2/23/11 | Assurance services
The comment period on the FASB and IASB's proposed accounting standard on leases ended on December 15, 2010 and the boards have begun redeliberating the exposure draft. Thus far, the boards have made tentative decisions to change the proposals in the exposure draft with respect to the definition of lease term (threshold for inclusion of extension options) and inclusion of variable or uncertain cash flows (i.e., contingent rent). The boards are also considering changes in the definition of a lease, profit and loss recognition patterns, and the lessor accounting model. This Dataline provides a summary of the overall status of the boards' redeliberations on lease accounting.
DatalineDataline: Leasing -- The responses are in... (No. 2011-05)
1/27/11 | Assurance services
The FASB and IASB received over 770 comment letters in response to their August 17, 2010 Exposure Draft, Leases. The comment period closed on December 15, 2010. The boards have also performed direct outreach with users and preparers, and held public roundtable discussions in London, Hong Kong, Chicago and Norwalk. This Dataline summarizes the key themes from the comment letters.
DatalineDataline: Highlights of the 2010 AICPA National Conference on Current SEC and PCAOB Developments (No. 2010-44)
12/16/10 | Assurance services
Last week's annual AICPA National Conference on Current SEC and PCAOB Developments focused on restoring public trust and investor confidence in the U.S. capital markets. Presenters called for all members of the financial reporting supply chain, including boards, management and auditors, to play a role in these efforts. This Dataline takes a closer look at the topics discussed at the conference.