accounting
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482391A6C80252151B3C979D795195A5.pptxNew Standard
Leases
New ASU 2016-02
Effective for years beginning after 12/15/18
Lessee will recognize assets and liabilities for leases with lease terms of more than 12 months
Two types of leases (as before) operating and financing (capital)
Disclosures expanded
Lessor changes minimal
ASU 2016-02
Is there an Asset?
Does the customer have the right to obtain substantially all of the economic benefits from the use of the asset throughout the period of use?
Does the customer or the supplier have the right to direct how and for what purpose the identified asset is used throughout the period of use?
Does the customer or the supplier have the right to operate the asset throughout the period of use without the supplier having the right to change those operating instructions?
Did the customer design the asset (or specific aspects of the asset) in a way that predetermines how and for what purpose the asset will be used throughout the period of use?
The contract does not contain a lease.
Customer
Yes
No
No
Supplier
No
Yes
Yes
Yes
No
The contract contains a lease.
Neither; how and for what purpose the asset will be used is predetermined
Current Developments
Lessee Accounting
Key difference between previous guidance and ASU 2016‐02 is recognition of a right‐to‐use asset (ROU) and lease liability on the statement of financial position for those leases previously classified as operating leases under old guidance
ASU 2016‐02 identifies two classifications of leases:
Finance leases (which replaces capital leases)
Operating leases
Classification of a lease as a finance lease will be based on criteria that are similar to those currently used to determine capital leases without explicit bright lines
Companies classify lease arrangements as either finance or operating. In either case, companies capitalize all leased assets and liabilities.
For a finance lease,
The lessee recognizes interest expense on the lease liability over the life of the lease using the effective-interest method and
records amortization expense on the right-of-use asset generally on a straight-line basis.
Finance and Operating Leases (Lessee)
LO 1
For an operating lease,
The lessee also measures interest expense using the effective-interest method. However, the lessee amortizes the right-of-use asset such that the total lease expense is the same from period to period.
Only a single lease expense (comprised of interest on the liability and amortization of the right-of-use asset) is recognized on the income statement.
Finance and Operating Leases (Lessee)
LO 1
From the lessee’s perspective, a lessee should classify a lease based on whether the arrangement is effectively a purchase of the underlying asset.
If the lease transfers control (or ownership) of the underlying asset to a lessee, then the lease is classified as a finance lease.
The lessee takes ownership or consumes the substantial portion of the underlying asset over the lease term.
All leases that do not meet any of the finance lease tests are classified as operating leases.
Lease Classification
LO 1
LO 1
For a finance lease,
must be non-cancelable and
meet at least one of the five tests.
A lease that, at the commencement date, has a lease term of 12 months or less.
Rather than recording a right-of-use asset and lease liability, lessees may elect to expense the lease payments as incurred.
Renewal or termination options that are reasonably certain of exercise by the lessee are included in the lease term.
Short-Term Leases
LO 4
Current Developments
Lessee Accounting
Initial Measurement
Lessees will be required to recognize the ROU asset and a lease liability on the balance sheet for virtually all of their leases
Liability will be measured at the present value of lease payments discounted at the rate implicit in the lease (if known) or the lessee’s incremental borrowing rate
Lessee Accounting
Subsequent Measurement
For finance leases, lessees will subsequently increase lease liability to reflect interest and reduce liability for lease payments
Related ROU asset will be amortized on straight‐line basis unless another systematic basis is found to be more representative of the pattern in which the lessee expects to consume the asset’s future economic benefits
For operating leases, lessees will subsequently measure ROU asset at amount of the re-measured lease liability
Lessees will generally recognize lease expense for these leases on a straight‐line basis similar to current GAAP
Current Developments
Lessor Accounting
Lessors are required to allocate contract price to separate lease and nonlease components in accordance with the transaction price allocation guidance in FASB ASC 606
Lessors will account for leases using an approach that is substantially equivalent to previously existing U.S. GAAP for sales‐type leases, direct financing leases, and operating leases, but updated to align with certain changed definitions
Current Developments
Lessor Accounting
Initial Recognition and Measurement
Classify as a sales‐type lease if any one of the five criteria used to identify a finance lease are met and if collection of payments is probable
If not, direct financing or operating
Direct financing if
Present value of the sum of lease payments and any residual value guaranteed equals or exceeds substantially the fair value of the underlying asset
Probable lessor will collect lease payments
If a lease is not classified as a sales‐type or direct financing lease, it is an operating lease
Current Developments
Current Developments
Lessor Accounting
Subsequent Measurement
For sales‐type leases, lessors will recognize interest income for accretion of net investment in the lease and reduce that investment for payments received
For direct financing leases, same treatment
Sale and Leaseback Transactions
ASU 2016‐02 virtually eliminates sale‐leaseback accounting
A sale‐leaseback transaction will qualify as a sale only if all the following conditions are met:
The transaction meets sale guidance in the new revenue recognition standard
The leaseback is not a finance or a sales‐type lease
If there is a repurchase option, the exercise price is at the asset’s fair value at the time of exercise, and alternative assets that are substantially the same as the transferred asset are readily available in the marketplace
Current Developments
Leveraged Leases
ASU 2016‐02 eliminates leveraged lease accounting for all leases that commence on or after its effective date
A lessor with a leveraged lease that commences before the effective date of the new standard will continue to apply leveraged lease accounting to that lease unless it is modified on or after the effective date
Current Developments
Lease Modifications
A change to contractual terms and conditions of a contract that results in a change in the scope of, or the consideration for, the lease
Payments made in connection with a modification are accounted for similar to the accounting for a new lease
In certain circumstances, the lessee may be required to re-measure the lease payments
Current Developments
Disclosures
ASU 2016‐02’s disclosure objective is to provide financial statement users sufficient information to assess the amount, timing, and uncertainty of cash flows arising from leases
In order to achieve this objective, lessees and lessors will be required to disclose qualitative and quantitative information about lease transactions
ASU 2016‐02 is effective for U.S. GAAP public companies for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. Early adoption is permitted.
Current Developments
Presentation
Summary of how the lessee reports the information related to finance and operating leases in the financial statements.
Presentation, Disclosure, and Analysis
LO 4
Presentation
Summary of how the lessor reports the information related to sales-type and operating leases in the financial statements.
Presentation, Disclosure, and Analysis
LO 4
Disclosure
Lessees and lessors must also provide additional qualitative and quantitative disclosures to help financial statement users assess the amount, timing, and uncertainty of future cash flows.
Presentation, Disclosure, and Analysis
LO 4
Disclosure
Quantitative information that should be disclosed for the lessee.
Presentation, Disclosure, and Analysis
LO 4
Disclosure
Quantitative information that should be disclosed for the lessor.
Presentation, Disclosure, and Analysis
LO 4
Analysis
With the increase in the assets and liabilities, a number of financial metrics used to measure the profitability and solvency of companies will change.
Return on assets will decrease.
Earnings before interest, taxes, and depreciation and amortization (EBIDTA), which likely will require some adjustments as companies amortize right-of-use assets.
Debt to equity ratio will increase, and the interest coverage ratio will decrease.
Presentation, Disclosure, and Analysis
LO 4
