Dataline A look at current financial reporting issues - PwC

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Topic Initial ED Revised ED PwC observations A lessor will not recognize amounts expected to be received under a residual value guarantee until the end of the lease. The lessor will consider guarantees when determining whether the residual asset is impaired. Sale & leaseback transactions If the transfer meets the condition of a sale, the transferor accounts for the transaction as a sale in accordance with the proposed revenue standard. When the conditions of a sale are not met, the contract is accounted for as a financing. A transferee will account for the transaction as a purchase if the conditions of a purchase are met. When not met the transferee will not recognize the transferred asset. The amounts recognized should be based on fair values with a gain or loss recognized. When a sale has occurred, pursuant to the revenue recognition guidance, the transaction would be accounted for as a sale and then a leaseback. Entities would apply the control criteria in the proposed revenue recognition standard to determine whether a sale has occurred. The boards' decision to align the sale criteria with the proposed revenue recognition standard would significantly change the proposal and may result in more transactions qualifying as a sale than under the initial ED and current GAAP. It may be appropriate to recognize upfront the full amount of the gain on sale. In longer duration leasebacks, some have argued that the seller/lessee retains a significant portion of the right-of-use asset and fundamentally only the residual asset was sold. In these cases, many believe only the portion of the gain relating to the sale of the residual asset should be recognized. There may be more discussion of sales & leasebacks and the interaction with the proposed revenue recognition standard when the revised ED is redeliberated. Seller/lessees that consummated a sale and leaseback transaction under existing U.S. GAAP that resulted in an operating lease are likely to pay particular attention to the proposed transition accounting. This is because any deferred gain on the original sale and leaseback will be reclassified into retained earnings at the transition date and will not provide the seller/lessee with any future income over the remaining term of the lease. National Professional Services Group | CFOdirect Network – www.cfodirect.pwc.com Dataline 38
Topic Initial ED Revised ED PwC observations Scope exclusions Lessees and lessors should apply the proposed guidance to all leases, except leases of intangible assets, leases of biological assets, and leases to explore for or use minerals. Entities that report under IFRS would also have an exemption for investment properties measured at fair value Includes contracts in which the right to use a specified asset (explicitly or implicitly identified) is conveyed, for a period of time, in exchange for consideration. Excludes: (1) leases to explore for, or use, minerals, oil, natural gas, and similar nonregenerative resources, (2) leases of biological assets, and (3) short-term leases. The FASB originally said it would provide an exemption for real estate measured at fair value pending completion of its Investment Property Entity project. However, in light of where the boards are with the dual model for lessors under the revised ED, this exclusion does not appear to be necessary. Short-term leases At the date of inception a lessee that has a short-term lease (12 months or less) may elect to ignore discounting when measuring the lease liability and asset. Lease payments would be recognized in the income statement over the lease term. Lessees and lessors can elect to account for leases that have a maximum term of 12 months or less (including any renewal options) in a manner similar to today’s accounting for operating leases. This will reduce the burden of identifying and tracking short-term leases at each reporting period, and may alleviate the need to determine if certain short-term contracts include an embedded lease that requires payments to be split between the lease and the non-lease components of a contract. However, it also allows lessees and lessors to forego the election if they prefer to record on the balance sheet short-term lease commitments for asset classes that are deemed to be significant. This exception may result in a fundamental change in the structure of some contracts to meet the definition of "short-term" and allow lessees to avoid recognition of lease assets and lease liabilities. A lessor may elect not to recognize lease assets and liabilities for short-term leases. Instead it would continue to recognize the underlying asset in accordance with National Professional Services Group | CFOdirect Network – www.cfodirect.pwc.com Dataline 39
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 17 and 18: PwC observation: Judgment will be r
Page 19 and 20: Time-charter contract: A time chart
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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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