Dataline A look at current financial reporting issues - PwC

.14 Although the project proposes changes to lessor accounting, it is the redeliberations
relating to lessee accounting that are expected to have the most far-reaching
implications. This Dataline discusses both the lessee and lessor proposed accounting
models.
.15 All board decisions noted in this Dataline are expected to be included in the revised
ED; however, all decisions are tentative and therefore subject to change in conjunction
with the drafting of the revised ED. A complete summary of the board's decisions on the
leases project is available on the FASB's website at www.fasb.org and the IASB's website
at www.ifrs.org.
PwC observation:
Redeliberations of the initial ED have been challenging for the boards as they seek to
balance concerns from preparers about the cost and complexity of applying the
proposals and demands from financial statement users to improve the usefulness of
financial information on leases. The boards have remained committed to a largely
converged solution and to a model under which lessees recognize lease assets and
liabilities on their balance sheets — one of the core objectives of the project. However,
other areas of redeliberations led to a compromise between conceptual purity and
practical application. The most significant of these relates to the boards' objective to
remove the existing bright-lines in current lease accounting with both boards failing
to find a one-size-fits-all solution. The "dual model" approach for both lessees and
lessors, while clearly a pragmatic solution, will most certainly attract significant
debate in the comment letter process. This debate will include both whether there
should be a dividing line and, if so, where it should be drawn.
Summary of the boards' redeliberations
Lessee expense recognition pattern
.16 The initial ED implicitly treats all leases as financing transactions with the
combination of amortization of the right-of-use asset, typically on a straight-line basis,
and interest expense, calculated using the effective interest rate method in the aggregate
creating an accelerated expense recognition pattern. Both preparers and users of
financial statements across a wide range of industries had significant concerns about this
front-loaded expense recognition pattern and the effect on key ratios of separately
presenting amortization expense and interest expense, rather than presenting a
combined rent expense within operating expense.
.17 After much debate the boards tentatively decided there should be a distinction in the
expense recognition pattern, with a straight-line pattern (the "single lease expense
approach" or "SLE") for some leases, and the initial ED's front-loaded pattern (the
"interest and amortization approach" or "I&A") for others. The determination of which
approach to apply is based on a "principle" of consumption with a practical expedient
based on the nature (property or non-property) of the underlying asset.
.18 Although the lease expense recognition patterns would be different, both approaches
would require the right-of-use asset and lease liability to be recorded on the balance
sheet, except for leases meeting the definition of "short-term" (defined as a maximum
possible term of less than 12 months). The liability would be initially measured at the
present value of the lease payments and subsequently measured at amortized cost using
the effective interest method. The right-of-use asset would initially be measured at an
amount equal to the lease liability plus initial direct costs.
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