Dataline A look at current financial reporting issues - PwC

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
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