Dataline A look at current financial reporting issues - PwC

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.19 However, the I&A approach requires interest expense (relating to the lease liability) and amortization expense (relating to the right-of-use asset) to be reported separately in the income statement, consistent with the initial ED. In contrast, the SLE approach requires the lessee to allocate total lease payments, including initial direct costs, evenly over the lease term, irrespective of the timing of lease payments, to calculate the periodic straight-line expense. Interest expense relating to the lease liability would be recognized in the same way as under the I&A approach. However, the right-of-use asset amortization expense would be a balancing figure, calculated as the difference between the periodic straight-line expense and the interest cost on the lease liability. Amortization of the right of use asset and interest relating to the lease liability would be reported in a single item in the income statement — "lease expense." .20 It is presumed that leases of property — defined as land and/or a building or part of a building — should be accounted for using a straight-line expense recognition pattern. This presumption is overcome if: or The lease term is for the major part of the underlying asset’s economic life; The present value of the fixed lease payments accounts for substantially all of the fair value of the underlying asset. .21 For leases of assets other than property — such as equipment — it is presumed that lessees should apply the approach proposed in the initial ED, unless: or The lease term is an insignificant portion of the underlying asset’s economic life; The present value of the fixed lease payments is insignificant relative to the fair value of the underlying asset. .22 The following decision tree depicts the emerging lessee accounting model under the revised ED: National Professional Services Group | CFOdirect Network – www.cfodirect.pwc.com Dataline 8
Potential outcomes for lessees Start Is the arrangement a lease, or does the arrangement contain a lease? No Apply non-lease accounting guidance. Yes Note on lessee decision tree: Under both the SLE approach and the I&A approach, all leases (except for short-term leases) are included on the balance sheet. Is the lease term for a major part of the underlying asset’s economic life or is the PV of the fixed lease payments substantially all of the fair value of the underlying asset? Yes No Yes Is there a purchase option (with significant economic incentive) or obligation to purchase? No No Is the lease a "short-term" lease? Is the leased asset property? No Yes Yes Accounting similar to purchase of an asset. Apply existing operating lease accounting model. Is the lease term for an insignificant portion of the underlying asset’s economic life or is the PV of the fixed lease payments insignificant relative to the FV of the underlying asset? Yes No Apply I&A approach Apply SLE approach Apply SLE approach Apply I&A approach National Professional Services Group | CFOdirect Network – www.cfodirect.pwc.com Dataline 9
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: .14 Although the project proposes c
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

Dataline A look at current financial reporting issues - PwC

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