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LEASE ACCOUNTING FOR STATE & LOCAL GOVERNMENTS
Overview of GASB’s Reexamination of Lease Accounting Guidance
April 7, 2015
Andy Richards, [email protected]
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AGENDA• Current Guidance
• Project Background & Considerations
• Lessee Accounting & Reporting
• Lessor Accounting & Reporting
• Other Issues
• Questions
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CURRENT GUIDANCE• GASB lease guidance is nearly identical to FASB current guidance
FASB has active lease project underway
• Potentially significant changes of FASB/IASB project
Technical inquiries regarding a GASB update to its leasing guidance
CURRENT GUIDANCE
National Council on Governmental Accounting (NCGA) Statement 5: Accounting and Financial Reporting Principles for Lease Agreements of State and Local Governments
GASB Statement No. 13: Accounting for Operating Leases with Scheduled Rent Increases
GASB Statement No. 62: Codification of Accounting and Financial Reporting Guidance Contained in Pre-November 30, 1989 FASB and AICPA Pronouncements
• Incorporates provisions of FASB Statement No. 13, Accounting for Leases, as amended & interpreted, into GASB’s authoritative literature
GASB Statement No. 65: Items Previously Reported as Assets and Liabilities
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CURRENT GUIDANCE• Even though operating leases represent long-term commitments to
make payments, no liabilities are reported, although there are disclosures
• Likewise, no assets are reported when governments have long-term rights to receive operating lease payments
• Concepts Statement No. 4, Elements of Financial Statements, established definitions of assets & liabilities
• Project provides an opportunity for GASB to consider whether operating leases meet definitions of assets or liabilities
PROJECT BACKGROUND• Objective – reexamine issues associated with lease accounting
FASB/IASB project
Issuance of concepts statements
Evaluate standards that have been in effect for a sufficient length of time
• Research project initiated April 2011
• Current agenda project added April 2013 Preliminary views issued November 2014
Comment deadline – March 6, 2015
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PROJECT CONSIDERATIONS• Information users’ needs regarding leases
• Are current standards appropriate to meet needs
• Should additional requirements be considered
• Types of leases Should there be distinction in accounting for different leases
• Do operating leases meet definitions of assets or liabilities
Preliminary Views, Leases
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APPLICATION
• Definition A contract that conveys the right to use an asset (the underlying asset) for
a period of time in an exchange or exchange-like transaction
• Scope Continue to include contracts not identified as leases but that meet
definition Continue existing scope exclusions
• Contracts for services that do not transfer right to use assets• Leases to explore for or use of minerals, oil, natural gas & similar nonregenerative
resources• Licensing agreements for such items as motion picture films, video recordings,
plays, manuscripts, patents & copyrights• Service concession arrangements
New scope exception for biological assets, including timber
APPLICATION• Scope
Leases that transfer ownership or contain a bargain purchase option be included in leases guidance but be reported as a financed sale or purchase of capital asset
• Single model No classification of leases into operating/capital or other categories
Potentially develop some exceptions
Underlying assumption that leases are financings
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LEASE TERM• Includes noncancellable period, plus periods covered by a lessee’s
option to renew, if option is probable of being exercised
• Excludes periods covered by a lessee’s option to terminate, if option is probable of being exercised
• Excludes periods for which lessee & lessor each have option to terminate
• Fiscal funding/cancellation clauses ignored if possibility of being exercised is remote
• Reassessed when change in relevant factors
THE LESSEE Accounting & Reporting
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RECOGNITION & MEASUREMENT• Recognize an intangible asset for right to use underlying asset & liability
for future payments• Initial measurement of a lease liability includes
Fixed payments to be made over lease term, less any lease incentives Variable payments based on an index or rate, using rate in effect at that date Variable payments that are in-substance fixed Residual value guarantees probable of being required Purchase options probable of being exercised Termination penalties if based on determination of lease term, termination
option is probable of being exercised Other payments probably of being paid
• Liability does not include Lease payments dependent on a lessee’s performance or usage of an
underlying asset
RECOGNITION & MEASUREMENT• Lease liability payments should be discounted using rate lessor
charges lessee, & if that rate cannot be readily determined, lessee’s incremental borrowing rate
• Initial measurement of a lease asset includes Value of initial lease liability Any prepayments (amounts paid for lease prior to measuring lease
liability) Initial direct costs if they are ancillary charges to place leased asset into
use
• Lease incentives received should be reductions in cost of lease assets
• Initial direct costs should be expensed if they are costs other than ancillary charges to place leased asset into use
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RECOGNITION & MEASUREMENT• Lease liability remeasured by calculating amortization on liability &
reducing liability for actual payments less amortization• Lease asset amortized using a systematic & rational basis over
shorter of useful life of underlying asset or lease term Amortize as if lessee owns underlying asset, using lessee’s depreciation
policy, if lease transfers ownership or if a purchase option is determined to be probable of being exercised
• Classify amortization of lease asset as amortization expense & amortization of discount on lease liability as interest expense in flows statement
REASSESSMENT
• Reassessment of a lease liability when certain judgments change Lease term Likelihood (probable to not probable or vice versa) of a nonbargain
purchase option being exercised Amounts expected to be payable under a residual value guarantee or
when there is a change in likelihood (probable to not probable or vice versa) a payment will be required
Index or a rate used to determine lease payments during reporting period may be significant
Amounts probable of being paid Rate lessor charges lessee
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REASSESSMENT• Reassessment of discount rate when
Lease term is changed There is a change in likelihood (probable to not probable or vice versa) a
purchase option will be exercised Result of a change in reference rate used to determine a variable lease
payment may be significant
ADJUSTMENT TO LIABILITY• Adjustments to lease liability generally should adjust lease asset by
same amount Exception: adjustments due to change in rate upon which a variable
payment is based should be revenue or expense in the period Exception: if adjustment is greater than carrying value of asset, difference
is recognized in flows statement
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RIGHT TO USE ASSET• Right-of-use asset in a lease is an intangible asset
Accounted for in accordance with existing authoritative guidance for capital assets
Relationship between underlying asset & lease asset could mean indicators of impairment present (change in manner or duration of use of lease asset)
A change in manner or duration of use of lease asset may indicate impairment of that asset
When asset underlying a lease is damaged & requires restoration or replacement, time period during which underlying asset is not usable generally is relevant factor in assessing whether impairment test has been met
An impaired lease asset first would be adjusted by any change in corresponding lease liability, with any remaining adjustment recognized as impairment loss
SHORT-TERM LEASES• Practicality exception for short-term leases A short-term lease is one that, at beginning of lease, has maximum
possible term under contract, including any options to extend, of 12 months or less
Maximum possible term for a cancellable lease be defined as any noncancellable period, including any notice periods
Leases that transfer ownership do not qualify for short-term lease exception, even if they meet other criteria
Accounting requirement for all leases that qualify Lessees not required to recognize assets or liabilities associated
with right to use underlying asset for short-term leases Lease payments be recognized as expenses/expenditures based on
terms of contract
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MULTIPLE COMPONENTS• Leases with multiple components
Separate contracts into lease & nonlease components or multiple lease components, subject to a practicality exception related to measurement
MULTIPLE COMPONENTS• Lessees allocate consideration to multiple components
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LESSEE DISCLOSURES• Lessees required to disclose the following
A general description of leasing arrangements, including basis, & terms & conditions on which variable lease payments are determined, & existence, & terms & conditions of residual value guarantees provided by lessee
Total amount of assets recorded under leases, & related accumulated amortization, disclosed separately from owned assets
Total variable lease payments actually incurred during reporting period Lease assets disaggregate by major classes of underlying assets A maturity analysis of future minimum lease payments that shows
payments for each of first five years & five-year increments thereafter, with payments shown undiscounted & total interest summed for all years
LESSEE DISCLOSURES• Lessees required to disclose the following
Lease commitments, other than short-term leases, for which lease term has not begun
Payments made in excess of contractual requirements, such as residual value guarantees or penalties
Components of a net impairment loss Amount of expense & expenditure recognized for period related to short-
term leases
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THE LESSORAccounting & Reporting
BALANCE SHEET RECOGNITION• Lessor’s right to receive payments would be recognized as an
asset—the lease receivable Fixed payments Variable payments dependent upon an index or rate In-substance fixed payments, including residual value guarantees Does not include variable payments based on performance (e.g., sales or
machine hours) Discounted using rate charged to lessee, may be an implicit rate
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REVENUE RECOGNITION• Lessor would recognize a deferred inflow of resources
Measured at receivable amount plus any cash received upfront at beginning of lease
Recognize lease revenue over lease term on a systematic & rational basis
• Lessor recognizes interest revenue over term of lease receivable
INITIAL MEASUREMENT• Initial measurement of lease receivable
Calculated as discounted future payments to be received during lease term, subject to a provision for uncollectible accounts
Recognize expense for initial direct costs in period in which costs are incurred
Discount rate used by lessor to determine present value of lease receivable should be rate lessor charges lessee
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LEASE RECEIVABLE• Components of lease receivable included in initial measurement
Fixed payments required for lease term Variable payments that depend on an index or rate & that are measured
using index or rate at beginning of lease Variable lease payments that are in-substance fixed Residual value guarantees that are in-substance equivalent to fixed lease
payments
RECOGNITION• Lessor recognizes revenue from variable payments based on a
lessee’s usage or performance when it is realizable
May be period when performance or usage (on which payments are based) takes place
• Residual value guarantees recognized as a receivable only when amount of payment has been decided but not yet paid, with revenue recognized (or expense reduced) at that time
• Payments for exercised purchase options recognized as a receivable & revenue only when options are exercised but not yet paid
• Termination penalties recognized as a receivable & revenue only when they are exercised but not yet paid
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SUBSEQUENT MEASUREMENT• Subsequent measurement of lease receivable by a lessor & related
issues Remeasure a lease receivable by calculating amortization of discount on
lease receivable & reducing lease receivable by actual lease payment amount less amortization of discount
Reassess lease term only when lessee actually extends or terminates lease opposite of what was previously expected
Remeasure a lease receivable when result of a change in an index or a rate used to determine lease payments during reporting period may be significant
REASSESSMENT• Reassessment of discount rate
When lease term is changed Change in reference rate included in a variable lease payment
• Initial selection of a discount rate by lessors also would be approach for selection of a discount rate in event of a reassessment Rate lessor charges lessee
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REMEASUREMENT• Impact of remeasurement of lease receivable on other financial
elements Adjustment to receivable for a change in lease term would be recognized
as an adjustment to related deferred inflow of resources Adjustment to receivable for a change in rate upon which variable
payments are based would be recognized as revenue or expense
LEASE RECEIVABLE• Presentation of lease receivable by lessor
Existing guidance on presentation of receivables applies to lease receivables &, therefore, no separate guidance necessary
Lessor would not be required to present underlying assets separately from other capital assets
• Disclose amounts of those assets held for leases in notes to financial statements
Guidance on presentation of lease activities in statement of cash flows in lessor’s model would be provided through implementation guidance
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LEASED ASSET• A depreciable leased asset would be depreciated
Unless that asset is required to be returned in its original or enhanced condition
• Assurance that a leased asset will be returned in its original or an enhanced condition should not be on basis of an asset management system
• A lessor’s lease asset that meets definition of an investment should be reported according to the provisions of GASB Statement No. 72, Fair Value Measurement and Application Measured at fair value if it meets definition of an investment
LESSOR DISCLOSURES• Disclosures by lessors
General description of leasing arrangements, including basis, & terms & conditions, on which variable lease payments are determined
Cost & carrying amount, if different, of property on lease or held for leasing
• By major classes of property • Amount of accumulated depreciation
Total amount of revenue recognized in reporting period related to leases
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LESSOR DISCLOSURES• Revenue relating to variable lease payments & other payments not
included in measurement of lease receivable Including revenue related to residual value guarantees & termination
penalties
• A maturity analysis of lease receivable, showing undiscounted cash flows to be received on an annual basis for a minimum of each of first five years & aggregated totals in five-year increments thereafter Reconciled to lease receivable
Other Issues
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SUBLEASES• Issues relating to subleases
Accounted for as transactions separate from their original leases Disclosure of treatment of subleases Subleases would be noted as one of items to be included in general
description of lease arrangements (if applicable) Lessor transactions related to subleases would be disclosed separately
from original lessee transactions
SALE-LEASEBACK TRANSACTIONS• Sale-leaseback transaction should include a qualifying sale in order
to be eligible for sale-leaseback accounting• Sale & leaseback portions of a sale-leaseback transaction should be
accounted for separately as a sale transaction & a lease transaction, except that any gain or loss on sale should be deferred over term of lease
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LEASE-LEASEBACK TRANSACTIONS
• Lease-leaseback transaction should be accounted for as a net transaction, with disclosure of gross amounts for each portion of transaction
LEASES WITH CERTAIN COUNTERPARTIES• Related-party leases would be recognized based on substance of
transaction, when substance is significantly different from form• Existing guidance with respect to leases between governments &
public authorities would be retained• Current treatment for leases with blended component units—do
not report lease in financial reporting entity’s financial statements—would be retained
• Eliminations for internal leasing activity would not take place within financial statements of financial reporting entity; rather, eliminations would take place before financial statements are aggregated
• Current treatment for leases with discretely presented component units—no elimination, but separate presentation of lease receivable & payable—would be retained
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WORK PLAN• April 2015 Public hearings• April - October 2015 Redeliberate issues based on respondent
feedback• November 2015 Review draft standards section• January 2016 Review preballot draft of an Exposure Draft• January 2016 (T/C) Review ballot draft & issue Exposure Draft• February - May 2016 Due process & comment analysis• June - September 2016 Redeliberate issues based on respondent
feedback• October 2016 Review preballot draft of final Statement• November 2016 (T/C) Review ballot draft & issue final Statement
QUESTIONS?
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