Dataline A look at current financial reporting issues - PwC

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Appendix: Other key areas of redeliberations Topic Initial ED Revised ED PwC observations Build-to-suit leasing transactions Not covered Will not be covered When a lessee is involved in a build-to-suit leasing transaction, it would no longer be required to account for that lease during the construction period between the inception and commencement dates of the lease. This is because the revised ED will require accounting for a lease contract from its commencement date, rather than its inception date. This will significantly change current practice on accounting for build-to-suit leases in the United States under ASC 840 as it will imply that the lease accounting guidance would only be applied once the underlying asset is available for use by the lessee. The financial statements would be required to disclose significant build-to-suit lease transactions prior to commencement of the lease. Further, in instances where payments are required prior to lease commencement, the lessee should recognize those amounts as prepayments and add them to the right-of-use asset at lease commencement. Business combinations Not covered Lessees and lessors should account for a lease acquired in a business combination as a new lease on the acquisition date. If the acquiree is a lessee, the acquirer should recognize a liability to make lease payments and a right-of-use asset. The acquirer should measure: As the lease contract acquired would be accounted for as a new lease, we believe that further clarification may be sought on applying the "consumption of the underlying asset" principle at the acquisition date to determine which accounting approach should be followed (e.g., I&A, SLE, etc.). Clarification may also be requested about whether initial assumptions should be updated (such as about extension options) when valuing leases upon acquisition or determining which approach to apply. If initial assumptions are updated at the acquisition date, the approach to apply (e.g., SLE or I&A for lessees) may change from that used on the lease commencement date. The liability as the present value of future lease payments at the acquisition date. The lessee's right-of-use asset recognized at the acquisition date should be adjusted for any off-market terms in the lease contract. National Professional Services Group | CFOdirect Network – www.cfodirect.pwc.com Dataline 24
Topic Initial ED Revised ED PwC observations If the acquiree is a lessor applying the receivable and residual approach, the acquirer should recognize a right to receive lease payments and a residual asset. The acquirer should measure: The right to receive lease payments as the present value of future lease payments at the acquisition date. The residual asset as the difference between the fair value of the underlying asset at the acquisition date and the carrying amount of the right to receive lease payments. If the acquiree has short-term leases, the acquirer should not recognize separate assets or liabilities related to the lease contract at the acquisition date. Cancellable leases Not covered Lease accounting should be applied only to leases for which enforceable rights and obligations arise. Cancellable leases include those that are cancellable by both the lessee and the lessor with minimal termination payments or include renewal options that must be agreed to by both the lessee and lessor. The intent of this provision is to ease the application burden for certain lessees (e.g., those in the construction industry) where shorter term lease contracts may not define a specific lease term but are structured on more of a "pay as you go" basis. However, one would need to determine whether there was an economic incentive to extend or not extend the term of the lease to evaluate whether the short-term lease exception could apply to these contracts. It is uncertain how many contracts will meet the definition of cancellable leases and be eligible for this relief. National Professional Services Group | CFOdirect Network – www.cfodirect.pwc.com Dataline 25
Page 1 and 2: Dataline A look at current financia
Page 3 and 4: .4 In June 2005, the Securities and
Page 5 and 6: .9 In early 2011, the boards began
Page 7 and 8: .14 Although the project proposes c
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
Page 15 and 16: Financial Instruments project. Howe
Page 17 and 18: PwC observation: Judgment will be r
Page 19 and 20: Time-charter contract: A time chart
Page 21 and 22: index or rate that was applicable f
Page 23: The path forward .61 The boards are
Page 27 and 28: Topic Initial ED Revised ED PwC obs

Dataline A look at current financial reporting issues - PwC

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