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Leases: Project update United Leasing Association (Russia) April 2012. Why a leases project?. Existing lease accounting does not meet users’ needs accounting depends on classification contractual rights and obligations (assets and liabilities) are off balance sheet - PowerPoint PPT Presentation
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International Financial Reporting Standards
The views expressed in this presentation are those of the presenter, not necessarily those of the IASB or IFRS Foundation.
© 2012 IFRS Foundation. 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
Leases: Project updateUnited Leasing Association
(Russia)April 2012
Why a leases project?
• Existing lease accounting does not meet users’ needs– accounting depends on classification– contractual rights and obligations (assets and liabilities)
are off balance sheet– users forced to adjust financial statements
• Complexity– dividing line between finance and operating is arbitrary– is there an underlying principle?
2
Where we are 3
2009 2010 2012 TBD
March 2009Discussion PaperLeases: Preliminary Views
August 2010Exposure DraftLeases
H2 2012Second Exposure DraftLeases
TBDFinal StandardLeases
Comment period 4 months
786 comment letters received
Contained proposals for both lessees and lessors
Re-expose proposals
Focus on revisions to 2010 proposals
Will contain proposals for both lessees and lessors
Effective date: TBDWill contain guidance for both lessees and lessors
Comment period 4 months
302 comment letters received
Primarily focused on lessee accounting
Proposed right-of-use model
• A lease contract is one in which the right to control the use of an underlying asset is transferred from the lessor to the lessee.
4
Lessor LesseeRight of use
2010 ED proposals for lessees
• Right of use accounting model: Lessee has acquired the right to use an underlying asset and is obligated to pay for that right with its lease payments.
5
Right of use model for lesseesBalance Sheet Income Statement
Right-of-use asset X Amortisation expense X
Liability to make lease payments*
X Interest expense X
* Discount at rate lessor charges the lessee or lessee’s incremental borrowing rate if lessor rate not available.
Why a right-of-use model?
• Reflects assets and liabilities arising in leases on the balance sheet
• Consistent with Conceptual Framework’s definition of assets and liabilities
• One accounting model for all leases – consistency and comparability
• Can be applied to all leases without arbitrary ‘bright lines’
6
Redeliberations–lessee model• General support for a right-of-use model
– Basic lessee accounting principle widely accepted, ie leases create assets and liabilities
• Feedback– ‘front-loading’ expense in P&L– elimination of rent expense
• Considered a dual accounting approach– finance lease (in-substance purchase)–as ED– other than finance lease (operating lease)–on balance
sheet, but straight-line rental expense
• Discussion to eliminate frontloading reopened in February 2012
7
Feb 2012: Lessee accounting approaches 8
Approach A: retain
current tentative decisions
(model proposed in 2010 ED)
Use different amortisation method for ROU asset
Approach B: interest-based
amortisation
Approach C: underlying
asset
2010 ED–lessor accounting 9
Does the lessor retain significant risks or benefits of the underlying asset?
Derecognition approach:•Derecognise underlying asset•Recognise residual asset•Profit on amount derecognised and interest income
Performance obligation approach:•Recognise underlying asset•Recognise performance obligation•Lease income, depreciation and interest income
No Yes
Both approaches: recognise lease receivable
Redeliberations–lessor model 10
All leases (except short-term leases and leases of investment property)
Balance Sheet Income Statement
Right to receive lease payments*
X Profit on transfer of right-of-use (gross or net based on business model)
X
Residual asset** X Interest income—on receivable and residual***
X
*Plus initial direct costs** Measured at an allocation of carrying amount of underlying asset*** Interest on residual based on estimated residual value—any profit on the residual asset is not recognised until asset sold or re-leased at end of lease term.
Redeliberations–investment property
Accounted for similar to today* Lessor measures IP at fair value or cost** Rental income recognised on a straight-line basis or another systematic basis, if more representative of pattern of earning rentals***If IP measured at cost, rental income plus depreciation recognised**** If IP measured at fair value, rental income plus fair value changes recognised
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Leases of investment property (IP)
Balance Sheet Income Statement
Investment property * X Rental income ** X
Depreciation ***, or (X)
Fair value changes **** X/(X)
Application example–equipment lease• Assumptions and workings:
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Fair value of leased asset CU1,000
Carrying amount of leased asset
CU950
Lease term 5 years
Residual (future value) CU500
Residual (present value) CU374
Rents (annual in arrears) CU149
Rate implicit in lease 6%
Initial direct costs none
PV of lease payments = Lease receivable
CU626
Total profit on transaction = FV of UA – CA of UA
1,000 - 950 = 50
Profit on ROU = lease rec/FV of UA * Total profit
626/1,000 * 50 = 31
Unearned income (profit relating to residual) = total profit – profit on ROU
50 – 31 = 19
Application example–equipment lease continued 13
Periods 0 1 2 3 4 5Balance sheetReceivable 626 515 397 273 140 0
Gross residual asset 374 396 420 445 472 500 Unearned income (19) (19) (19) (19) (19) (19)Net residual asset 355 377 401 426 453 481
Income statement
Gain on sale 31 -
-
-
-
-
Interest on receivable - 38 31 24 16 8
Unwinding interest for residual asset -
22 24 25 27 28 Total lease income 31 60 55 49 43 37
Reducing complexity and cost 14
2010 ED Post-ED simplifications
Options to extend the lease term (term options)
• Longest possible lease term more likely than not to occur
• Reassessed
• Option period included if lessee has significant economic incentive to exercise
• Reassessed other than for market conditions
Variable lease payments
• Included in lease liability on probability-weighted basis
• Reassessed
• Excluded from liability (unless in-substance fixed or based on an index or rate) and accounted for as occurred
• Reassessed for spot/index
Short–term leases (lease term ≤ 12 months)
• Liability/asset recognised with no discounting
• No liability/asset recognised• Rent expense• IAS17 operating lease model
Redeliberations–definition of a lease
• ‘Contract in which the right to use an asset (the underlying asset) is conveyed, for a period of time, in exchange for consideration’
– underlying asset=identifiable (physically distinct)– right to control use of underlying asset
• Notion of control changed– ‘ability to direct the use’ and receive benefits– change from EITF 01-8/IFRIC 4/ED:
if entity obtains substantially all output ≠ control–pricing does not determine control
15
Redeliberations–lessee other issues
• Multi-element contracts– separately account for non-lease elements– allocate between lease and non-lease elements if there
are observable prices
• Lessee residual value guarantees– include in lease payments amounts expected to be
payable
• Sale and leaseback transactions– if sale, account for as sale then leaseback
16
Redeliberations–lessor other issues
• Impairment– financial asset impairment guidance for receivable– non-financial impairment guidance for residual asset
• Residual value guarantees– not recognised separately– considered when assessing residual asset for
impairment
• Multi-element contracts– separately account for non-lease elements– allocate using revenue guidance (selling price)
17
Redeliberations–lessee presentation
• Balance sheet– RoU asset presented as if owned– Liability to make lease payments
• Statement of cash flows– principal financing– interest as other interest payments are presented– variable lease payments not included in RoU asset:
operating– short-term lease payments operating
18
Redeliberations–lessor presentation
• Balance sheet
• Statement of cash flows– cash inflows from leases operating activities
19
ReceivableResidual
Lease assets
on the face or notes
on the face
Redeliberations–lessor disclosure
• Reconciliation of lease receivable and residual asset• Maturity analysis• A table of all lease income, including short-term• Details of contingent rentals and options• Details of purchase options• Details on residual asset risk management including
quantitative exposure• Similar requirements for investment property lessors
scoped out of receivable and residual approach
20
Redeliberations–transition
• 2010 ED proposals gave rise to front-loading for lessees
• Revised approach– Retrospective application
with simplifications in determining the rate and calculations
– Use of hindsight– Grandfathering of finance leases– Option to apply without simplifications
21
What happens next? 22
2-3Q2012
H22012 2012 TBD
Redeliberations Publish Revised Exposure Draft*
Consultation Issue Final Standard
OutreachWorking group meetings Redeliberations
Comment letter period TBD
Effective date: TBD
OutreachRedeliberations – lessee subsequent measurement
Where to go for more information 23
IASB website www.ifrs.org
Contact detailsProject team Investor liaison
Patrina Buchanan Aida Vatrenjak Jess Lion Hilary Eastman
[email protected] [email protected] [email protected] [email protected]
Questions or comments?
Expressions of individual views by members of the IASB and its staff are encouraged. The views expressed in this presentation are those of the presenter. Official positions of the IASB on accounting matters are determined only after extensive due process and deliberation.
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