Dataline A look at current financial reporting issues - PwC

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PwC observation: Seller/lessees that consummated a sale and leaseback transaction under existing U.S. GAAP that resulted in an operating lease are likely to be concerned with the proposed transition accounting. This is because any deferred gain on the original sale and leaseback will be reclassified into retained earnings at the transition date and will not provide the lessee with any future income over the remaining term of the lease. Leverage lease lessors are also likely to raise concerns with the proposal to eliminate, rather than grandfather, the accounting for leverage leases that exist at the transition date. .58 All lessees and lessors will need to consider the deferred tax implications that will arise on transition as a result of changes that will be made to both the balance sheet and income statement presentation of existing leases. The effect on retained earnings of these transition related deferred tax adjustments could be significant. .59 The boards decided not to provide relief for leases outstanding at the date of transition that expire prior to the effective date of the new standard or for arrangements that were grandfathered in accordance with the transition requirements in ASC Topic 840. Further, arrangements that meet the definition of a lease today, but do not meet the definition of a lease in the revised ED would cease applying lease accounting on the transition date. The arrangement would be reclassified under other existing guidance (e.g., revenue recognition) and a cumulative catch-up adjustment would be recognized in retained earnings. .60 Notwithstanding the lack of grandfathering for determining whether an arrangement is, or contains, a lease, and consistent with the initial ED, the boards will require a simplified transition for lessees and lessors with capital and finance leases under today's guidance. Lessees and lessors will continue to recognize existing carrying amounts at the beginning of the earliest comparative period presented, even when the lease contract includes terms relating to option periods and variable lease payments. PwC observation: We believe the boards intend for the definition of a lease to be applied retrospectively — that is, any contracts in place as of the beginning of the earliest period presented that are determined to be leases under the revised definition at the transition date would follow the new rules. The lack of grandfathering for existing leases will mean that extensive data-gathering will be required to inventory all contracts. For each lease, a process will need to be established to capture information about lease term, renewal options, and fixed and contingent payments. The information that will be required under the revised ED will typically exceed that needed under current GAAP. Depending on the number of leases, the inception dates, and the records available, gathering and analyzing the information could take considerable time and effort. Beginning the process early will help to ensure that implementation of the final standard is orderly and well controlled. Companies should also be cognizant of the proposed model when negotiating lease contracts between now and the effective date of a final standard. National Professional Services Group | CFOdirect Network – www.cfodirect.pwc.com Dataline 22
The path forward .61 The boards are planning to issue the revised ED at the end of November 2012, however, this may slip into early 2013. Issuance of a final standard, although targeted for 2013, may well slip into 2014. Although the effective date has not yet been discussed, it will likely not be before 2016. Preparers will need to apply the guidance to all leases existing as of the beginning of the earliest comparative period presented. Questions .62 PwC clients who have questions about this Dataline should contact their engagement partner. Engagement teams that have questions should contact members of the Leasing team in the National Professional Services Group (1-973-236-7805). National Professional Services Group | CFOdirect Network – www.cfodirect.pwc.com Dataline 23
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Page 3 and 4: .4 In June 2005, the Securities and
Page 5 and 6: .9 In early 2011, the boards began
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Page 9 and 10: Potential outcomes for lessees Star
Page 11 and 12: loss and cash flows. After much bac
Page 13 and 14: The revised dual lessor accounting
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Page 17 and 18: PwC observation: Judgment will be r
Page 19 and 20: Time-charter contract: A time chart
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Page 25 and 26: Topic Initial ED Revised ED PwC obs

Dataline A look at current financial reporting issues - PwC

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