In brief: FASB and IASB publish revised exposure draft on leases (No. 2013-26)

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In brief 05/16/2013 by Assurance services
In brief: FASB and IASB publish revised exposure draft on leases (No. 2013-26)

At a glance

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.

What's new?

On May 16, 2013, the FASB and IASB (the boards) issued a revised exposure draft on leases. The revised exposure draft attempts to address criticisms of the 2010 exposure draft, yet still meet the key objective of recognizing leased assets and liabilities on the balance sheet. Comments on the exposure draft are due September 13, 2013.

What are the key provisions?

Lessee accounting

A right-of-use asset and a liability to make lease payments will be recognized on the balance sheet for all leases (except short-term leases). The income statement will reflect either a front-loaded expense pattern (similar to today’s capital leases) or straight-line expense (similar to current operating leases).

Lessor accounting

Lessors will either record straight-line income (similar to current operating leases) or follow a new receivable and residual approach under which a lessor will recognize a lease receivable and a residual asset. Profit on the receivable is recognized immediately; profit on the residual is deferred until the underlying asset is re-leased or sold. Interest income on the receivable and residual asset is recognized over the lease term.

Dual model

Income statement recognition will depend on the nature of the underlying asset and whether the lessee acquires or consumes more than an insignificant portion of the asset.

  • Property leases (e.g., real estate):  Apply straight-line recognition unless the lease term is for the major part of the underlying asset’s economic life or the present value of fixed lease payments is substantially all of the fair value of the underlying asset.
  • Other than property leases (e.g., equipment):  Recognize front-loaded expense (lessees) or apply a receivable and residual approach (lessors) unless the lease term is insignificant compared to the underlying asset’s economic life or the present value of fixed lease payments is insignificant relative to the fair value of the underlying asset.

Other provisions

  • Distinguishing between a lease and a service:  New guidance for assessing whether a contract contains a lease will require reassessment of existing contracts and may result in a different accounting treatment for some arrangements.
  • Lease components:  In a multi-asset lease, an entity will need to identify and account for each component as a separate lease. Classification will depend upon the primary asset within the component. When a component contains both land and a building, an entity will not allocate lease payments between them
  • Lease term:  Lease term will include the noncancellable lease term and extension options where the lessee has a significant economic incentive to extend the lease. Reassessment will occur when there is a significant change such that the lessee now has, or no longer has, a significant economic incentive to extend the lease.
  • Variable lease payments:  Variable lease payments based on usage or performance (e.g., tenant sales) will not be considered in measuring the lease asset and liability unless viewed as "in-substance" fixed lease payments.

What are the alternate views?

Three of the seven FASB members have presented alternative views. These views reflect concerns about whether all of the core objectives of the project have been met, the cost-benefit of the proposal, the dual model, and the usefulness of the proposed disclosures. Two IASB members have presented alternative views that support the application of a single lease model. Both sets of alternative views also include some concerns with the proposed accounting for variable leases payments and renewal options.

Is convergence achieved?

The boards jointly redeliberated the comments on the 2010 exposure draft and jointly issued the revised exposure draft. Convergence is expected to be achieved.

Who's affected?

The proposed standard will have a pervasive impact on an organization's business processes, systems, and controls. Entities will need to inventory their contracts for possible leases/embedded leases and catalogue the identified leases.

What's the transition and effective date?

Pre-existing leases will not be grandfathered and all leases will be reassessed. The boards have not yet proposed an effective date; however, we do not expect the final standard to be effective prior to 2017.

What's next?

Comments on the exposure draft are due September 13, 2013. We do not expect a final standard to be issued before 2014.

PwC will be airing a two-part webcast on the exposure draft:  Part 1 (May 29, 2013) will provide an overview of the proposed guidance and Part 2 (June 11, 2013) will discuss impacts beyond financial reporting and potential action items.

Questions

PwC clients who have questions about this In brief should contact their engagement partner. Engagement teams that have questions should contact the Leasing team in the National Professional Services Group (1-973-236-7805).

Authored by: 

Tom Wilkin
Partner
Phone: 1-973-236-4251
Email: tom.wilkin@us.pwc.com

David Humphreys
Partner
Phone: 1-973-236-4023
Email: david.humphreys@us.pwc.com

Ashima Jain
Managing Director
Phone: 1-408-817-5008
Email: ashima.jain@us.pwc.com