In depth: Pharmaceutical and Life Sciences industry supplement to leasing standard

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In depth , PwC US Aug 25, 2016

We highlight areas that could create challenges for pharmaceutical and life sciences companies.


Earlier this year, the FASB issued its long-awaited and much anticipated standard on leasing. Under the new guidance, lessees will be required to bring substantially all leases onto their balance sheets. This and other provisions will likely introduce some level of change for all entities that are party to a lease.

This supplement to our In depth on lease accounting highlights some of the areas that could create the most significant challenges for entities in the pharmaceutical and life sciences sector as they transition to the new standard, including: determining whether an arrangement is or contains a lease, considering the new explicit classification criterion for specialized assets that have no alternative use to the lessor, identifying triggering events that may require reassessment of a lease, and navigating changes to the build-to-suit guidance that may impact the accounting for the construction of laboratory facilities. Medical device lessors will need to consider changes made to both the revenue recognition and leasing guidance, which may introduce some additional complexities.

In addition, PwC’s accounting guide, Leases – 2016 edition, was released in April 2016 and contains a comprehensive overview of the new leasing standard and its related impacts.


Leases are common in the pharmaceutical and life sciences sector. Entities are generally lessees and, at times, lessors of assets such as medical devices. Lease accounting literature and related interpretations under US GAAP has sometimes presented challenges for lessees, and can result in different financial reporting outcomes for economically similar transactions based solely on the nuanced terms of particular leasing transactions. The FASB’s new standard, Leases (ASC 842) represents the first comprehensive overhaul of lease accounting since FAS 13 was issued in 1976. The FASB’s objectives for the new standard were increased transparency and comparability across organizations.

ASC 842 requires lessees to capitalize all leases with a term of more than one year. A lessee’s income statement recognition of lease-related expense will depend on the lease’s classification as either an operating or financing lease. See Lease classification on page 7 for more details. Although the pattern of expense recognition may be similar to today’s accounting, the amount of lease expense recorded will likely differ due to changes in how certain elements of rent payments are treated.

The accounting model for lessors is substantially equivalent to existing US GAAP, but lessors will also need to consider the implications of the new revenue recognition standard. Lessors will classify leases as operating, direct financing, or sales-type based on criteria similar to that used by lessees, plus an additional requirement to assess the collectibility of lease payments.


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David Schmid

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

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