accounting for leases

We are hosting a two day conference covering all aspects of the new rules in San Jose, CA on March 21-22, 2017: http://acslive.com/event/leases_sanjose_march2017/

See all upcoming live conferences and live accounting conferences here: 2016 Schedule

The New Lease Accounting Standard was presented by BD’s Hank Galligan on June 14, 2016. This presentation had three learning objectives.

• To identify the main provisions of the new lease standard as contrasted with prior accounting requirements
• To identify financial statement presentation and disclosures required by the new lease standard
• To recognize operational impact of the new standard

The presentation begins by providing information on Scope and identifying a lease based upon

• Whether contract fulfillment depends on use of an identified asset
• Whether contract conveys right to control use of identified asset for consideration for a time period

The presentation looks further into identifying a lease by identifying the five criteria for lease classification as seen below.

1. Transfer of ownership of underlying asset to lessee by end of lease term
2. Option to purchase underlying asset that lessee is reasonably certain to exercise
3. Lease term = major part of remaining economic life of underlying asset
4. Sum of PV lease payments and PV any residual value guaranteed by lessee ≥ substantially all of the FV of underlying asset
5. Underlying asset is of such a specialized nature that it is expected to have no alternative use to lessor at end of lease term

The discussion on leases further with the information on topics such as lease terms, lease payments, and lease modification.

It is then shown how Lessee accounting demonstrates the decrease of lease expenses over nine years. The presentation moves on to Lessor Accounting and its initial and subsequent measurements of sales-type, operating, and direct financing leases. Other considerations of variable lease payments are mentioned such as

• Impairment of net investment
• Modifications – change in lease type
• Components
• Sale/leasebacks
• Leveraged leases
• Alignment of principles with Topic 606

Lessee disclosures are provided including

• Contractual details (lease term, contingent rentals, options, etc.) and related accounting judgments
• Information about significant leases that have not yet commenced
• Amounts related to lease cost (including any amounts capitalized) and related cash flows, separately for operating and finance leases
• If practical expedients related to short-term leases and separation of lease and non-lease components elected, disclose that fact and related details

Lessor disclosures mentioned include

• Contractual details (lease term, contingent rentals, options, etc.) and related accounting judgments
• Narrative disclosures about leases (including information about variable lease payments and options)

BDO Knowledge concludes the presentation by speaking on Lessee and Lessor Accounting transitions as seen below as well as transition considerations.

• Modified retrospective approach with hindsight allowed for evaluating renewal and purchase options on existing leases. No option for full retrospective.
• Significant relief provisions allowed as a policy election – No reassessment of:

• –  Whether any expired or existing contracts are or contain leases
• –  Classification for any expired or existing lease
• –  Initial direct costs for expired or existing leases
• Considerations of planning to transition has an impact on ICFR, Planning and budgeting, Taxes, Compensation arrangements, Debt covenants and other contracts, Internal and external communication, IT systems/data management, and Lease structure strategy.