New proposal to simplify the new leases standard for certain lessors

Start adding items to your reading lists:
or
Save this item to:
This item has been saved to your reading list.

Jan 09, 2019

FASB proposes changes to lessor accounting that will impact financial institutions, captive finance companies and entities in the scope of financial services depository and lending guidance.

What happened?

On December 19, the FASB issued an exposure draft proposing the following amendments to the new leases standard, ASC 842, Leases, for certain lessors:

  • A lessor that is not a manufacturer or dealer (generally financial institutions and captive finance companies) would use the cost of the underlying asset, subject to any applicable trade or volume discounts, in place of fair value to classify and measure leases. Fair value would still be required if there is a significant time lapse between the acquisition of the asset and lease commencement. 
  • Lessors in the scope of ASC 942, Financial Services - Depository and Lending, would continue to classify principal payments received under sales-type and direct financing leases within investing activities in the Statement of Cash Flows.

The effective date for the proposed amendments would be for fiscal years beginning after December 15, 2019 and interim periods within those fiscal years for all public companies. For private companies, the proposed amendments would be effective for fiscal years beginning after December 15, 2019 and interim periods beginning the following year. Early application would be permitted. The proposed amendments would be applied at the date that an entity first applied ASC 842 using the same transition methodology.

Why is this important?

ASC 840, Leases, provides an explicit exception for lessors (that are not manufacturers or dealers) that allows them to use the cost of the underlying leased asset (subject to applicable volume or trade discounts) instead of fair value (as defined in ASC 820, Fair Value Measurement) when assessing lease classification and measuring the lease. Thus, qualifying lessors capitalize acquisition and delivery costs associated with the underlying asset. Because fair value equals the qualifying lessor’s cost, no selling profit or loss is recognized at lease inception for sales-type and direct financing leases.

The new leases standard did not carry forward this exception, but the new proposed amendments would reinstate the fair value exception for impacted lessors.

ASC 840 does not provide guidance on the lessor’s presentation of cash flows from sales-type and direct financing leases. In practice, lessors within the scope of ASC 942 have presented principal payments received from such leases in investing activities. The proposed amendment will eliminate conflicting guidance between ASC 842 and ASC 942 and enable such lessors to continue to present principal payments received from sales-type and direct financing leases as investing activities, consistent with the presentation of principal payments received on loans.

What's next?

Comments on the exposure draft are due by January 15, 2019.

To have a deeper discussion, contact:

Scott Tornberg

Partner, National Professional Services Group, PwC US

Email

Ashima Jain

Managing Director, National Professional Services Group, PwC US

Email

Contact us

David Schmid

International Accounting Leader, National Professional Services Group, PwC US

Follow us