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