Dataline A look at current financial reporting issues - PwC

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Topic Initial ED Revised ED PwC observations Contract modifications or changes in circumstances after the date of inception of the lease Not covered A change in circumstances other than a modification to the contractual terms of the contract that would affect the assessment of whether a contract is, or contains, a lease should result in reassessment. When there is a contract modification that results in a different determination as to whether the contract is, or contains, a lease, the original contract would be considered terminated and the modified contract would be accounted for as a new contract. While the need for reassessment upon a contract modification may be evident, changes in circumstances may be more challenging to identify. For example, a contract to use a specified rail car for five years will likely be a lease. However, if the contract is amended to provide a substantive substitution clause allowing the supplier to replace the rail car with a similar rail car at its discretion, the contract would be reassessed and might not be considered a lease. Contrast this with a situation where, at inception, the contract to use a rail car for five years includes a substitution clause. If the substitution clause is not substantive because, for example, the supplier does not have other rail cars on hand to swap out, the contract would likely be considered a lease. If the supplier later procures other rail cars, and thus the substitution clause becomes substantive, the contract would be reassessed and might not be considered a lease. Other changes in circumstances could include: situations where a leased asset becomes less unique such that it is no longer implicitly specified, or when there are changes in the value of the economic benefits provided by a leased asset or changes in other contracts relating to the inputs, processes, and outputs relating to the leased asset that result in a different conclusion as to a customer's ability to control the use of the asset. The reassessment would apply only to whether a contract is, or contains, a lease. Accordingly, if the contract is within the scope of lease accounting, the determination at lease commencement of which lease approach should be applied is not reassessed if there is a change in circumstances. The boards are not expected to provide guidance on how one would account for a modification to the contractual terms of a contract after inception that upon reassessment does not change the initial conclusion of whether an arrangement is, or contains, a lease. Examples of contract modifications are changing lease payments, and adding or removing extension options, purchase options, and residual value guarantees. National Professional Services Group | CFOdirect Network – www.cfodirect.pwc.com Dataline 26
Topic Initial ED Revised ED PwC observations Disclosure Lessees and lessors should disclose qualitative and quantitative information that (a) identifies and explains the amounts recognized in the financial statements arising from leases; and (b) describes how leases may affect the amount, timing and uncertainty of the entity’s future cash flows. Lessee's should disclose a reconciliation of the opening and closing balance of lease liabilities for both I&A and SLE leases, a single maturity analysis of the undiscounted cash flows related to all lease liabilities, and costs for the period relating to variable lease payments not included in the lease liability. Lessors should disclose a table of all lease-related income items, a reconciliation of the opening and closing balance of the right to receive lease payments and residual assets, and a maturity analysis of the undiscounted cash flows that are included in the right to receive lease payments. Although changes have been made to the disclosures to be required in the revised ED, constituents are likely to make similar comments to those raised on the initial ED. Companies are likely to consider the proposals overly burdensome, specifically the requirements to provide a number of reconciliations of balance sheet, income statement, and cash flow statement activity. Financial statement users may raise concerns about the piecemeal nature of the disclosures, questioning how intuitive it will be for users to put together the various pieces of disclosure to provide them with useful information about an entity's lease activities. These concerns were raised by some of the FASB members who are contemplating providing an alternative view in the revised ED. Finally, some may question how the disclosure proposals align with the FASB's thoughts in its recently issued discussion paper entitled the Disclosure Framework. Note: Listing is not inclusive of all required disclosures. Discount rate A lessee should use the incremental borrowing rate or, if it can be readily determined, the rate the lessor charges the lessee. A lessor should use the rate the lessor charges the lessee Lessees should discount lease payments using the rate charged by the lessor if known; otherwise, the lessee’s incremental borrowing rate should be used. Lessors should discount lease payments using the rate they charge in the lease. The discount rate should not be reassessed if there is no change in lease payments. Lessees would not be obligated to seek out the rate the lessor is charging in the lease. The rate the lessor is charging is more likely to be identifiable in equipment leases, particularly when the equipment may also be purchased outright. For other types of leases, including real estate leases with rents based on cost per square foot, the lessee rarely knows the rate the lessor is charging because it is typically not relevant to negotiations. In determining the incremental borrowing rate, the lessee uses a discount rate commensurate with a secured borrowing that the lessee could obtain to finance the purchase of the specific asset over a borrowing term consistent with the initial expected term of the lease (including any extension options that include a significant economic incentive to exercise). For example, if a company were entering into a lease of a property in Chicago with an assumed term of 10 years, it would use a rate consistent with a 10 year fixed rate secured borrowing for National Professional Services Group | CFOdirect Network – www.cfodirect.pwc.com Dataline 27
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
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Page 19 and 20: Time-charter contract: A time chart
Page 21 and 22: index or rate that was applicable f
Page 23 and 24: The path forward .61 The boards are
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Dataline A look at current financial reporting issues - PwC

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