Dataline A look at current financial reporting issues - PwC

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Topic Initial ED Revised ED PwC observations The discount rate is reassessed when there is a change in the lease payment due to: A change in the assessment of whether the lessee has a significant economic incentive to exercise an option to extend the lease or purchase the underlying asset. property located in Chicago. Private companies with no third party debt and group entities where lease arrangements are held in different subsidiary entities are likely to question what incremental borrowing rate to use if the lessee has no outstanding debt. We have heard from many preparers that they believe more guidance should be provided on how to assess the appropriate discount rate in these and similar circumstances. The exercise of an option that the lessee did not have a significant economic incentive to exercise. Embedded derivatives Not covered. A company should assess whether a lease contract includes embedded derivatives that should be separated and accounted for in accordance with applicable derivative guidance. This is not a substantial change from current practice under U.S. GAAP. Impairment Not covered. Lessees would follow existing guidance on impairment of long-lived assets when evaluating the right-of-use asset. For lease receivables, lessors could elect to either fully apply the "three-bucket" model or apply a simplified approach in which lease receivables would have an impairment allowance measurement objective of lifetime expected credit losses at A right-of-use asset accounted for under the single lease expense model would have a higher risk of impairment due to the fact that the asset balance would be higher than if the lease was accounted for under the I&A approach. This is because under the SLE approach, depreciation of the right-of-use asset is backend loaded to generate a total straight-line lease expense. The boards have yet to clarify if impairment testing can be done at a portfolio level or if it must be done on an individual lease basis. While a portfolio level test for leases with common characteristics (e.g., similar automobiles) may be possible, it may be challenging to apply such an approach to assets with different characteristics (e.g., different retail store locations). For retailers with a significant number of leased stores, performing an impairment test on a lease by lease basis may be a significant undertaking. National Professional Services Group | CFOdirect Network – www.cfodirect.pwc.com Dataline 28
Topic Initial ED Revised ED PwC observations initial recognition and through the lease receivables' life. Lessors would follow existing guidance for fixed assets when evaluating the residual asset. The “three bucket” impairment model for lease receivables is currently under discussion by the boards. The boards plan to meet in the fall of 2012 to further discuss the proposed model. It remains unclear whether the boards will achieve convergence on the impairment model. Inception vs. commencement The lease is measured at lease inception (i.e., the earlier of the date of signing the lease agreement or the date of commitment). However, the asset and corresponding liability would not be recorded until the commencement date of the lease, which is the date on which the lessor makes the leased asset available to the lessee. The lessee and lessor will initially measure and recognize the lease assets and lease liabilities (derecognize any corresponding assets and liabilities) at the date of commencement of the lease. This is the date on which the lessor makes the underlying asset available to the lessee. The decision to measure and record the lease asset and liability on the same date would simplify the guidance. However, at lease inception, lessees would still be required to determine if an onerous lease contract exists and account for it in accordance with existing guidance. Initial direct costs Initial direct costs are required to be capitalized and added to the lessee's right-of-use asset. Initial direct costs are defined as recoverable costs directly attributable to negotiating and arranging a lease. Initial direct costs are required to be capitalized and added to the lessee's right-of-use asset and to the amount recognized as the lessor’s lease receivable. Initial direct costs are defined as costs that are directly attributable to negotiating and arranging a lease that would not have been incurred had the lease transaction not been entered into. Although the boards did not revisit this issue after moving to a dual model approach, we understand that this guidance applies to both lessees and lessors irrespective of which model is used. National Professional Services Group | CFOdirect Network – www.cfodirect.pwc.com Dataline 29
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Page 9 and 10: Potential outcomes for lessees Star
Page 11 and 12: loss and cash flows. After much bac
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Dataline A look at current financial reporting issues - PwC

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