Dataline A look at current financial reporting issues - PwC

More documents

Recommendations

Info

Topic Initial ED Revised ED PwC observations In substance purchases/sales An entity would not apply the guidance to contracts that meet the criteria for classification as a purchase or sale of an underlying asset. No guidance for distinguishing a lease of an underlying asset from an insubstance purchase or sale of that asset was provided. A contract represents a purchase or sale if, at the end of the contract, an entity transfers to another entity control of the entire underlying asset and all but a trivial amount of the risks and benefits associated with the entire underlying asset, such as with an automatic transfer or bargain purchase option. No guidance for distinguishing a lease of an underlying asset from an in-substance purchase or sale of that asset has been discussed during redeliberations. Instead, the leases standard will focus on the definition of a lease. If the lease definition is not met, the contract should be accounted for in accordance with other applicable standards, such as revenue recognition by lessors and property, plant and equipment or executory contract accounting by lessees. While the concept of in-substance purchase is not expected to be included in the revised ED, a similar accounting result occurs where there is a purchase option with a significant economic incentive to exercise or a purchase obligation. Further, the elimination of in-substance sales from the leases guidance will reduce some of the inconsistency between the leases and revenue recognition guidance. Lessors will be required to evaluate indicators of continuing involvement (e.g., put/call options, purchase obligations, and lessor guarantees) in accordance with the principles-based approach in the proposed revenue recognition guidance rather than the existing rules-based guidance to determine whether they are in the scope of the revenue or lessor accounting model. This may result in a significant change to the timing of when a lessor would recognize revenue. Lease incentives Not covered. Lessees will deduct all lease incentives from the initial measurement of the right-of-use asset. It is unclear whether the differentiation in the accounting that exists today between incentives that are provided for lessor improvements and incentives that are provided for lessee improvements will be carried forward under the revised ED. The revised ED is expected to provide detailed application guidance on how various lease incentives and other payments between the lessee and lessor that are not scheduled as "lease payments" should be accounted for. National Professional Services Group | CFOdirect Network – www.cfodirect.pwc.com Dataline 30
Topic Initial ED Revised ED PwC observations Leveraged lease (Lessor accounting in U.S.) Not covered. Leveraged lease accounting will be eliminated and a lessor will be required to apply the general lessor approach appropriate for the underlying asset. Since pre-existing leases will not be grandfathered, companies with leveraged leases could have significant balance sheet increases as the inherent secured borrowings and deferred taxes in leverage lease transactions presented net today would need to be presented on a gross basis. Further, significant transition adjustments to retained earnings may result as the expense recognition patterns will change. Non-lease elements (e.g., service elements and "executory costs" such as real estate taxes, insurance and utilities) Lessees and lessors should apply the proposed revenue standard to a distinct service component of a contract that contains both service and lease components. If the service component is not distinct, the FASB proposed that lease accounting should be applied to the combined contract. The IASB proposed that a lessee and a lessor applying the performance obligation approach should apply lease accounting to the combined contract, whereas a lessor applying the derecognition approach should account for the revenue component in accordance with the proposed revenue Lease and non-lease components in a multiple element contract should be identified and accounted for separately. The boards have implied that all lease and non-lease elements for real estate should be separated. This includes segregating from lease payments amounts relating to both services and items that today are considered "executory costs," such as real estate taxes, insurance, and utilities. Judgment may be required to allocate payments due under a lease contract between the various lease and non-lease components. For net leases or modified gross/base year leases, service elements are either separately billed (e.g., net lease) or readily obtainable in the lease contract (e.g., the base year portion of a modified gross lease). For gross leases, based upon the specific facts and circumstances, we would recommend a lessee seek to obtain the amounts being billed for services from the lessor or make estimates of these amounts using market-based information. Questions are likely to arise regarding the application of this allocation guidance when a multiple element contract provides for both fixed and variable payments. We believe that this evaluation will be facts and circumstances driven. The allocation of consideration between lease and non-lease components will become more important because of the requirement to always recognize assets and liabilities for the lease component of the contract. National Professional Services Group | CFOdirect Network – www.cfodirect.pwc.com Dataline 31
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 and 24: The path forward .61 The boards are
Page 25 and 26: Topic Initial ED Revised ED PwC obs
Page 29: Topic Initial ED Revised ED PwC obs

Dataline A look at current financial reporting issues - PwC

You also want an ePaper? Increase the reach of your titles

Delete template?

Save as template?