Dataline A look at current financial reporting issues - PwC

The revised dual lessor accounting approach
.29 When the lessee does not have a right to acquire or consume more than an
insignificant portion of the underlying asset (typically presumed for leases of property),
the lessor will apply an approach similar to existing operating lease accounting. Under
this approach:
The underlying leased asset remains on the balance sheet of the lessor.
No lease receivable or gain/loss is recorded at lease commencement.
Rental revenue is recognized on a straight-line basis over the terms of the respective
leases.
Unbilled rents receivable represent the cumulative amount by which straight-line
rental revenue exceeds rents currently billed in accordance with the lease
agreements.
.30 When a lease gives a lessee the right to acquire or consume more than an
insignificant portion of the underlying asset (typically presumed when the underlying
asset is not property), the lessor will apply the receivable and residual approach. Under
this approach, the lessor at lease commencement will:
Derecognize the entire carrying amount of the leased asset.
Recognize a receivable measured at the present value of the remaining lease
payments, discounted at the rate the lessor charges the lessee.
Recognize a residual asset, measured as an allocation of the carrying amount of the
underlying asset. This comprises a gross residual asset and a deferred profit
component.
.31 Under the receivable and residual approach, day one profit is recognized on the
portion of the underlying asset conveyed to the lessee via a right-of-use. This profit would
be measured as the difference between the present value of the lease receivable and the
cost basis of the underlying asset allocated to the lease receivable. Any profit on the
portion of the underlying asset retained by the lessor (related to the lessor's residual
interest in the leased asset) would be deferred and only recognized when the residual
asset is sold or re-leased. If the underlying asset is re-leased, a new lease calculation for
profit to be recognized over the new lease term is performed, with a portion of the
remaining profit deferred. If the underlying asset is sold at the end of the lease term, the
remaining profit would generally be recognized.
.32 The lease receivable is subsequently measured using the effective interest rate
method and would be subject to an impairment assessment. Specifically, for lease
receivables, lessors could elect to either fully apply the "three-bucket" model proposed in
the Financial Instruments project or apply a simplified approach. Under the simplified
approach, lease receivables would have an impairment allowance measurement objective
of lifetime expected credit losses at initial recognition and through the lease receivables'
life.
.33 General concepts — Many respondents to the revised ED are likely to challenge the
boards' decision to apply a lessor model that is symmetrical with lessee accounting. For
example, they may question whether:
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