Leasing - recent proposals, impairment and subleases (Ep 33)

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In this podcast, PwC’s Jim Gazley, Ashima Jain and Shannon Detling continue their discussion of the new leases standard helping listeners work through their implementation plans and answer common questions. Serving as the third installment in our leasing podcast series, this episode covers the new FASB proposals related to transition, as well as accounting for impairments and subleases.

Listen to our other podcasts in this series:
Episode 31: Leasing - remeasurement, modifications and terminations
Episode 28: New Lease standard - Day one issues

| Duration 18:09


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Show notes

In this episode we’ll discuss a few of the FASB’s recent proposed amendments. We will also continue our leasing discussion focusing on impairment and subleases. In Episode 28 of our podcast, we talked about some issues in implementing the new leases standard including the identification of a lease, a day one loss that a lessor can incur in certain transactions, and also some transition issues. And in Episode 31 of our podcast, we discussed some of the issues that lessees and lessors will face in accounting for certain events or changes in circumstances after a lease commences -- such as remeasurements, modifications, and terminations.

The FASB’s recent proposals to amend the new leases guidance related to transition brings good news to listeners. Under the FASB’s recent exposure draft, while still using the modified retrospective method, companies can elect to apply the new rules at the effective date - so January 1, 2019 for public business entities with a calendar year end, without adjusting the comparative periods presented. Check out the FASB’s project page for updates and expected timing of issuance of a final amendment.

The FASB has also proposed guidance that allows lessors a practical expedient to not separate nonlease components from the associated lease component. Instead a lessor would be able to elect to account for the arrangement as a single lease component, but only in certain circumstances. This election would need to be made by class of underlying asset. As with the above, you can check the FASB’s project page for updates and further developments on this proposal.

In January 2018, the FASB issued an amendment to the new leases guidance that adds a new transition practical expedient related to land easements. This practical expedient will allow an entity to not assess whether any expired or existing land easements are, or contain, leases if they were not previously accounted for as leases under the existing leasing guidance. Instead the entity can continue to apply its existing accounting policies to historical easements. This optional practical expedient would effectively grandfather a company’s prior accounting.

In addition to new amendments and proposals, we also discussed impairment and subleases.

  • For lessee impairment accounting, both operating and finance leases, companies will need to consider impairment of the right-of-use asset under ASC 360 - which is the same asset impairment guidance that is applied to property, plant, and equipment. In other words, the right-of-use asset should be included in the applicable asset group and tested for impairment under ASC 360. For a lessor, the impairment guidance will depend on lease classification.
  • When accounting for a sublease transaction, the accounting for the original lease by the original lessee depends on whether the original lessee remains primarily or secondarily liable. For purposes of classifying the sublease, the new leases guidance says that the sublessor should classify the sublease based on the underlying asset, rather than the right-of use asset.

For additional information on both of these topics, refer to chapters 4 and 8 of PwC’s Leases guide.

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Heather Horn
Strategic Thought Leader, National Professional Services Group, PwC US

David Schmid
IFRS & US Standard Setting Leader, National Professional Services Group, PwC US

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