new lease accounting standards - fasb 842 and ifrs 16

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FASB & IFRS Lease Accounting Standard Changes

Lease Accounting Standard Changes

• The FASB & IASB are in final deliberations of issuing new lease accounting standards by replacing FAS 13/IAS 17.

• One converged standard has been dropped.

• The leasing standards objective is to capitalize all material leases on lessee’s books.

• The lessee will account for the lease contract’s rights & obligations as assets & liabilities.



March 2009

August 2010

May2013

TODAY End2015

Date of Initial Application Jan 1, 2017

(*)

2019

TRAN

SITION

DiscussionPaper

ExposureDraft

SecondExposureDraft

Planning FinalStandard

ParallelReporting

EffectiveDate for

Implementation

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(*) For Companies with December 31, year ends


If your year end is: You will likely transition to the new rules in your financial statements for the year ended:

December 31 December 31, 2019 March 31 March 31, 2020June 30 June 30, 2020

September 30 September 30, 2020


IFRS: Early application permitted but only if the entity is also applying IFRS 15 Revenue from contracts with customers. Subtract 1 year from this slide and all following slides.

FASB: Waiting on Decision


Other Reporting Companies Reg. S-‐X [3-‐01, 3-‐ 02, 3-‐04]

• Balance Sheet: 2 fiscal year-‐ends• Income Statement: 3 years

Source:http://www.sec.gov/divisions/corpfin/cffinancialreportingmanual.pdf

SEC Reporting Requirements:



If your year end is: You will have a comparative parallel Balance Sheet for transition to the new rules for the year ended:

December 31 B/S: Dec 31 2018, 2019 March 31 B/S: Mar 31 2019, 2020June 30 B/S: June 30 2019, 2020

September 30 B/S: Sept 30 2019, 2020



If your year end is: You will have a comparative parallel Income Statement for transition to the new rules for the

year ended: December 31 I/S: Dec 31 2017, 2018, 2019March 31 I/S: Mar 31 2018, 2019, 2020June 30 I/S: June 30 2018, 2019, 2020

September 30 I/S: Sept 30 2018, 2019, 2020



Lessee Accounting

FASB: IFRS:

• Dual lease accounting model (Type A and Type B terminology replaced with finance lease and operating lease).However, both now capitalized.

• Single lease accounting model

• FASB “reinstated” the 75% of useful life and 90% of fair value “bright lines” in the lease classification guidance.

• No lease classification test

• Operating leases treated as executory contract in P&L, but now capitalized.

• All leases treated as purchase of ROU asset on a financed basis (i.e. all leases are Finance Leases)

• No exemption for small leases • Exemption for small leases even if material in the aggregate



Lessee Accounting

FASB: IFRS:

• Reassessment of Lease Term only upon the occurrence of a significant event or a significant change in circumstances that are within the control of the lessee

• Same

• Reassessment only required when the lease payments are re-‐measured for other reasons

• Required to reassess when there is a contractual change and when the lease payments are re-‐measured for other reasons

• Other Differences include: Subleases, Sale Lease Backs and Transition rules.


Agreements with Lease and Non-‐Lease Components

When there is an observable standalone price for each component or

When there is not an observable standalone price for some or all components

Separate and allocate based on relative standalone price of components – maximize the use of observable information but reasonable estimates allowed



Agreements with Lease and Non-‐Lease Components

Taxes and insurance on the property

Accounting policy election by class of underlying asset

Activities (or costs of the lessor) that do not transfer a good or service to the lessee are not components in a contract

Account for lease and non-‐ lease components together as a single lease component



Lease Term is equal to:

Non-‐cancellable period

Optional renewal periods if lessee reasonably certain to exercise

Periods after optional termination date if lessee reasonably certain not to exercise termination option




Proposed FASB Lease Classification Tests:FASB “reinstated” the 75% of useful life and 90% of fair value “bright lines” in the lease classification guidance.

Is the lease a financed purchase or a rental based on IAS 17 like risks and rewards tests: lessee would effectively obtain control of the underlying asset when any oneof the following three criteria is met at lease commencement:

(a) The lease transfers ownership of the underlying asset to the lessee by the end of the lease term. (b) The lessee has a significant economic incentive to exercise an option to purchase the underlying

asset . (c) The lessee otherwise has the ability to obtain substantially all of the remaining benefits of the

underlying asset as a result of the lease. Situations that individually or in combination would normally indicate that the lessee has the ability to obtain substantially all of the remaining benefits of the underlying asset as a result of the lease include: i. The lease term is for a major part of the remaining economic life of the underlying asset. ii. The sum of the present value of the lease payments and any residual value guaranteed by the

lessee amounts to substantially all of the fair value of the leased asset. iii. The underlying asset is of such a specialized nature that it is expected to have no alternative

use to the lessor at the end of the lease term.”




Proposed Transition relief:


Same – say Jan 1, 2017

No need to re-‐test classification.


Same – starting Jan 1, 2019

Compared to NOT elected.




Need to re-‐test classification.


Same – starting Jan 1, 2019

Compared to elected.



Other Important Items Not Discussed Today:

• Definition of a lease

• Service contracts with Embedded Leases

• Exemptions and practical expedients (short term, small ticket, portfolio level)

• Transition Rules (FASB: modified retrospective only. Full retrospective not permitted.)



Issues frequently overlooked in publications

• System and resource requirements

• Deferred Tax Accounting

• Increased need for asset level data

• Increased audit scrutiny as now on balance sheet



An approach to simplifying what is required.

1. What would challenges be today if all operating leases had to be capitalized under existing US GAAP / IFRS for capital leases?

2. What are additional requirements or changes with future US GAAP and IFRS?

3. What is required for the transition period?



1. Challenges today if all operating leases had to be capitalized under existing rules

This is where most of the work is!

• Data and document gathering and centralization• Track and link asset and liability at asset level• Asset and liability accounting and reporting• Reconciled documentation• Drill-‐Down Capabilities• Mid-‐term and end-‐of term partial events • Deferred Income Tax• Assessment of Tax Issues



2. Additional requirements or changes with future rules?

For many, incremental changes not significant.

• Fundamental Change or Increased Scrutiny?

• “Reasonable Certainty” of Holding Period

• Possible Need for re-‐assessment (FAS / IAS Differences)

• New Disclosure Requirements

• Estimates Allowed for Breaking Down Components.



3. What is required for the transition period?

• Multiple sets of books.

• Effective beginning of comparative period

• Lease Administration and Accounting Software integrated to ERP

• Opportunity for Organizations to gain better control and avoid overpaying on leases

• Evidence of compliance from portfolio to schedule to asset to executed documentation.



http://www.ifrs.org/Current-‐Projects/IASB-‐Projects/Leases/Documents/Practical-‐implications-‐Leases-‐Standard-‐Project-‐Update-‐March-‐2015.pdf

Appendix A: Source > IFRS.ORG


Summary of similarities and differences for lessee accounting

3 Lease liabilities are measured in the same way under the IASB model and the FASB model, except that inflation-‐linked payments are reassessed when those payments change under the IASB model, but are not under the FASB model.4 Lease assets are measured at an amount that achieves the recognition of a single lease expense typically on a straight-‐line basis.5 Under IFRS, interest payments can be presented within either operating or financing activities.

New: FASB cash flow statement will not change for operating leases.


More Information

Download our Lease Accounting Changes Handbookwww.leaseaccelerator.com/whitepaper


Thank You

Web: www.leaseaccelerator.comEmail: [email protected]: 1-866-446-0980

new lease accounting standards - fasb 842 and ifrs 16

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