Dataline A look at current financial reporting issues - PwC

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Topic Initial ED Revised ED PwC observations Purchase obligations An entity should not apply lease accounting to contracts that meet the criteria for classification as a purchase or sale of an underlying asset. A contract represents a purchase or sale of an underlying asset 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. An entity would meet this condition if it will transfer title to the underlying asset to the transferee at the end of the contract term or if the contract includes a bargain purchase option. The determination is made at inception and is not subsequently reassessed. Guidance on distinguishing between a lease of an underlying asset and the purchase or sale of an underlying asset is not provided. If an arrangement does not contain a lease, it should be accounted for in accordance with other applicable standards (e.g., property plant and equipment or revenue recognition). The existence of a lessee purchase obligation may affect whether a lessee should apply the I&A or SLE approach and whether a lessor should apply the receivable and residual or operating lease approach. If the lessee applies the I&A approach, the accounting is expected to be similar to that for a purchase of the underlying asset. Similarly, a lessor applying a receivable and residual approach would apply accounting that resembles a sale of the entire underlying asset (including any residual), even though legal title to the underlying asset does not transfer to the lessee until a later date. National Professional Services Group | CFOdirect Network – www.cfodirect.pwc.com Dataline 36
Topic Initial ED Revised ED PwC observations Reassessment Lessees and lessors should remeasure assets and liabilities arising under a lease when changes in facts and circumstances indicate there is a significant change in the liability to make payments or right to receive payments. A lessee and lessor should reassess the lease term only when there is a significant change in relevant factors such that the lessee would then either have, or no longer have, a significant economic incentive to exercise any options to extend or terminate the lease. Lease payments that depend on an index or a rate should be reassessed using the index or rate that exists at the end of each reporting period. The requirement to reassess these estimates entails significant incremental effort compared to the current model, under which lease accounting is set at inception and revisited only if there is a modification or extension of the lease. In addition, it may be necessary to invest in information systems that capture relevant information and support the reassessment of lease terms and payment estimates as facts and circumstances change. Residual value guarantee For lessees, the rightof-use model would require that the initial measurement of the obligation to pay rentals include residual value guarantees. Lessors would be required to recognize a receivable for residual value guarantees, but only if the receivable could be reliably measured. Lease payments should include amounts expected to be payable under residual value guarantees, except for those guarantees provided by an unrelated party. For lessees, amounts expected to be payable under residual value guarantees should be amortized consistently with how other lease payments included in the right-of-use asset are amortized. The amounts should be reassessed when events or circumstances indicate that there has been a significant change in the amounts expected to be payable under the residual value guarantee. The boards' redeliberation of the accounting for residual value guarantees occurred before the decision was reached that the lessee and lessor should apply a dual accounting model. As a result, there is currently no distinction in applying the guidance by lessees that use the SLE rather than I&A approach or by lessors that apply an operating lease, rather than receivable and residual, approach. National Professional Services Group | CFOdirect Network – www.cfodirect.pwc.com Dataline 37
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
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Dataline A look at current financial reporting issues - PwC

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