Dataline A look at current financial reporting issues - PwC

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Topic Initial ED Revised ED PwC observations other guidance and recognize lease payments in the income statement over the lease term. Subleases The accounting for subleases builds on the lessee and lessor accounting models that the boards have proposed. When a leased asset is subleased, the sublessor would account for the head lease (i.e., the lease agreement between the original lessor and the lessee/sublessor) in accordance with the proposed right-of-use lessee model. It would account for the sublease under the appropriate proposed approach for lessor accounting. Subleases would be accounted for as two separate transactions. That is, a sublessor would utilize lessee accounting on the head lease and lessor accounting on the sublease. We understand that there could be situations where the head lease and the sublease are accounted for under different models. For example, there may be a situation where a head lease is accounted for based on an I&A approach and the sublease is accounted for using an approach similar to existing operating lease accounting for lessors. Therefore, the sublessor could report lease expense on the head lease that is not completely offset by income on the sublease. Several questions may arise regarding how a sublessor would determine which lessor accounting approach to apply. Would the "consumption of the underlying asset" principle be applied to the actual asset being leased or just the portion of the asset that is leased by the sublessor? For example, how would a 9 year sublease be assessed that relates to a 1o year head lease for property with an economic life of 40 years? Would the sublessor consider the underlying asset to be the 10 year head lease or would the sublessor look to the 40 year economic life of the property? Some may have conceptual concerns over the accounting for a head lease and sublease. For example, the revised ED is likely to imply that a sublessor would initially recognize a right-of-use asset in relation to the head lease. However, if the sublease qualifies for the receivable and residual approach, it would appear that the entire right-of-use asset would be derecognized and replaced with a lease receivable and a residual asset. Application questions are likely to arise about how the lessee presentation and disclosure requirements should be applied to the head lease if the right-of-use asset is derecognized by the sublessor. National Professional Services Group | CFOdirect Network – www.cfodirect.pwc.com Dataline 40
Topic Initial ED Revised ED PwC observations Term option penalties Expected payments of term option penalties should be included in the measurement of assets and liabilities arising from a lease using the expected outcome technique. The accounting for term option penalties should be consistent with the accounting for options to extend or terminate a lease. That is, if a lessee would be required to pay a penalty if it does not renew the lease and the renewal period has not been included in the lease term, that penalty should be included in recognized lease payments. Lessees should consider term options consistently between the lease term and lease liability. For example, if the term option penalty is minimal and the lease will not be extended, as there is no significant economic incentive, the lessee would not include the option in determining the lease term. However, the lessee would be required to include the term option penalty in the calculation of the lease liability. National Professional Services Group | CFOdirect Network – www.cfodirect.pwc.com Dataline 41
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
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Dataline A look at current financial reporting issues - PwC

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