Overview - FASB Exposure Draft Leases (Topic 840). February 2, 2011. Douglas Boedeker , CPA, CMA [email protected] 202-419-5106. Course Outline. Why is the exposure draft being issued? FASB timeline Project scope Recording by lessees Work through an example Recording by lessors
Why is the exposure draft being issued?
Recording by lessees
Work through an example
Recording by lessors
Leases are an important source of finance – more information required.
Concern over lack of comparability.
Concern over “bright-line” test for operating vs. capital lease.
Simple – ALL Leases
Leases of intangible assets
Leases of mineral rights, etc.
Leases of biological assets
Distinct service components of a lease agreement should be accounted for in accordance with the new ED on revenue from contracts with customers.
“A contract in which the right to use a specified asset is conveyed, for a period of time, in exchange for consideration.”
(Future anticipated cash payments discounted to present value at either the lessee’s incremental borrowing rate or the rate implicit in the contract.)
(Lease liability plus initial direct costs of acquiring the lease.)
Amortize the “right of use asset”. (Probably on a straight-line basis.)
Adjust the lease liability using the effective interest rate method.
(Essentially treated like a note payable.)
Reassess significant assumptions and adjust for current facts and circumstances. (Discount rate does NOT change.)
Thus, the P&L reflects amortization expense and interest expense.
Assume a tenant enters into a five year lease with two five-year renewal options.
The tenant must assess the likelihood of whether each renewal option will be exercised.
HINT: Always start this analysis with the longest possible term at the bottom and work your way up!Determining the “lease term”
A 10 year term will be used when initially recording the lease.
Let’s assume that our lease includes a provision for annual “pass-throughs” based on increases in building operating expenses and property taxes. These are anticipated to start at $50,000 per year.
Our tenant’s incremental borrowing rate is 8%.
Let’s assume that our lease mandates annual fixed “base” payments of $1,000,000 per year.
Legal fees of $10,000 were incurred as part of the review of the lease document.
Based on the lease term and contingent rental analysis performed, the liability and asset are calculated as follows…….
Does the lessor retain significant risks or benefits of the underlying asset during or subsequent to the expected lease contract?
If NO, use the “Derecognition Approach”
If YES, use the “Performance Obligation Approach”
Leased asset stays on books (and depreciated as usual).
Receivable is booked for the “right to receive lease payments”.
Liability (unearned revenue) is booked for the corresponding “lease liability”.
The unearned revenue is recognized over time (likely straight-line basis). Term to be used is “lease income”.
Interest income is recognized on the receivable.
“Simplified Retrospective Method”
Determine all remaining lease payments as of date of implementation, discount, and record the corresponding asset and liability.
Nothing definite yet, perhaps 2013 or later for nonpublic entities?