Dataline A look at current financial reporting issues - PwC

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Topic Initial ED Revised ED PwC observations standard even where it is not distinct. Presentation – cash flow A lessee should classify cash payments for leases as financing activities in the statement of cash flows and present them separately from other financing cash flows. A lessor should classify cash receipts from lease payments as operating activities in the statement of cash flows Under the SLE approach, the lessee would classify cash paid for all lease payments as operating activities. Under the I&A approach, the lessee would classify cash paid for lease payments relating to the principal as financing activities, and classify or disclose cash paid for lease payments relating to interest in accordance with applicable GAAP on the statement of cash flows. Variable lease payments not included in the measurement of the liability to make lease payments and shortterm lease payments not included in the liability to make lease payments would be classified as operating activities. For lessees under the I&A approach, the statement of cash flows will become more complex than under current operating lease accounting because lease payments will be split between operating and financing cash flows. These changes in classification may require changes to certain compliance ratios included in lessees' bank covenant arrangements. However, the impact to both operating and financing cash flows will be lower than under the initial ED because of the change in classification of the interest element of lease payments. For lessees under the SLE approach and for lessors, the cash flow statement presentation is not expected to be significantly different than under existing practice. A lessor should classify the cash inflows from a lease as operating activities in the statement of cash flows. Presentation — Balance sheet for lessees A lessee should present liabilities to make lease payments separately from other financial liabilities and present right-ofuse assets as if they were tangible assets For leases under the I&A approach and SLE approach: Lease assets and lease liabilities should be separately presented in the statement of financial position or notes to the Most lessees will present the right-of-use asset within property, plant, and equipment. However, for financial institutions, it is not clear how regulators will view the right-of-use asset for purposes of determining minimum regulatory capital requirements. If regulators view the right-of-use asset as an intangible, it may not be considered an asset included in the denominator of Tier One leverage ratios and would be subject to higher risk weighting for the risk-based capital ratios. National Professional Services Group | CFOdirect Network – www.cfodirect.pwc.com Dataline 32
Topic Initial ED Revised ED PwC observations within PP&E or investment property, as appropriate, but separately from assets that the lessee does not lease. financial statements. The right-of-use asset would be classified in a manner consistent with classification had the entity owned the underlying asset. For lessees, the changed profile of the balance sheet and related income statement effects could have implications for state and local tax apportionment as well as franchise and property taxes. Multi-national companies will also need to evaluate the impact of the changes in rules on their international tax profile. There will be no clarification of whether the right-of-use asset recognized by the lessee represents a tangible or intangible asset. Presentation – Balance sheet for lessors A lessor applying the derecognition approach should present rights to receive lease payments separately from other financial assets and should present residual assets separately within PP&E. Under the receivable and residual approach the lessor should either present the lease receivable and the residual asset: Separately in the balance sheet, summing to a total to be called "lease assets," or Together in a single line item—lease assets—in the balance sheet, and separately disclose those two amounts in the notes. The revised ED is not expected to require explanation of the underlying nature of the residual asset. The requirement to recognize accretion of the residual asset as interest income is consistent with a view that the residual asset is a financial asset. However, the presentation option and the requirement to apply a long-lived asset impairment, rather than financial asset impairment, model may imply that the residual asset should be viewed as non-financial. Presentation would remain consistent with current practice for leases not classified under the receivable and residual approach. National Professional Services Group | CFOdirect Network – www.cfodirect.pwc.com Dataline 33
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
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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 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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