Need to get your arms around the new leases standard? In this podcast hear PwC's Jim Gazley, Ashima Jain and Gregory Johnson discuss some of the issues lessees and lessors will be facing on Day 1, such as identification of a lease, how lessees and lessors should classify and account for leases, and effective date and transition. We also highlight some of the significant differences between the new and the current lease accounting guidance and examine certain unique transition issues.
| Duration 30:11
The new leases standard will impact companies across all industries, and the effective date is quickly approaching. The standard will impact both lessees and lessors.
For lessees, all leases with a lease term of greater than one year will be recorded on a lessee's balance sheet in the form of a right-of-use asset and a lease liability. On the income statement, a lessee will reflect a lease as either an operating lease or a finance lease.
For lessors, accounting is now more closely aligned with the new revenue recognition model. Therefore, lessors will need to consider the interaction of the leases standard with the guidance in the revenue recognition standard in areas such as variable payments and their impact on the calculation of transaction consideration and allocation to components.
Under the new guidance, for an arrangement to be a lease, or to contain an embedded lease, it has to convey to a customer the right to control the use of an identified property, plant or equipment for a period of time in exchange for consideration.
Significant variable payments in a Lessor's sales-type lease can lead to some interesting results, including the potential for a lessor to recognize a “Day 1 loss” even though the arrangement overall is profitable.
The effective date for public business entities is for fiscal years beginning after December 15, 2018, including interim periods in those years. So, calendar year-end public business entities will need to adopt the standard by January 1, 2019.
There is just one adoption method for all companies – the modified retrospective method. Under this method, the new guidance will apply to comparative annual and interim periods presented.
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