REVISED EXPOSURE DRAFT ON LEASING (ED2) ISSUED MAY 16, 2013 DEVELOPED AND PRESENTED BY: JOHN C....
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REVISED EXPOSURE DRAFT ON LEASING (ED2) ISSUED MAY 16, 2013 DEVELOPED AND PRESENTED BY: JOHN C. FUSCO, JR. CPA MACE OCTOBER 17, 2013 LEASING JOHN C. FUSCO,
REVISED EXPOSURE DRAFT ON LEASING (ED2) ISSUED MAY 16, 2013
DEVELOPED AND PRESENTED BY: JOHN C. FUSCO, JR. CPA MACE OCTOBER 17,
2013 LEASING JOHN C. FUSCO, JR. CPA, MT 1
Slide 2
AT THIS POINT THE NEW METHODS ARE LIKELY TO BECOME AN
ACCOUNTING STANDARD UPDATE (ASU) ARE THERE ARGUMENTS AGAINST IT?
Yes, but the economists and non-accountants have won the battle
accountants have fought for years. STATED OBJECTIVE OF THE ED
Establish principles that Lessees and Lessors should apply to
report useful information to users of financial statements about
the amount, timing and uncertainty of cash flows arising from a
lease. LEASING JOHN C. FUSCO, JR. CPA, MT 2
Slide 3
Most businesses of some size, and not too large either, have
leases. Some companies have many leases on their books. Think about
it, most companies have: Office/Building lease(s) Vehicle leases
(cars and trucks) Computer leases Phone equipment lease Other
equipment leases LEASING JOHN C. FUSCO, JR. CPA, MT 3
Slide 4
Any entity that enters into a lease and reports in accordance
with GAAP, is subject to the new accounting for leases, except:
Short Term leases leases of less than 12 months total. Leases of
intangible assets Leases of minerals etc. (non-regenerative
resources) Leases of Biological assets including timber LEASING
JOHN C. FUSCO, JR. CPA, MT 4
Slide 5
The core principle involved is that an entity should recognize
assets and liabilities arising from a lease. Lessee accounting
requires reporting a Right- of-Use asset and a lease obligation
Lessor accounting requires application of the receivable and
residual method LEASING JOHN C. FUSCO, JR. CPA, MT 5
Slide 6
Many users of financial statements (mostly analysts) say that
the bright line classification of lease as capital and operating
fails to meet the users needs because they do not always provide a
faithful representation of leasing transactions because they do not
require lessees to recognize assets and liabilities arising from
operating leases. LEASING JOHN C. FUSCO, JR. CPA, MT 6
Slide 7
When we are finished with todays presentation ask yourself:
WHAT ARE WE GAINING WITH THE NEW MODEL AS TO INFORMNG USERS OF THE
FINANCIAL STATEMENTS ABOUT THE AMOUNT, TIMING AND UNCERTAINTY OF
CASH FLOWS ARISING FROM LEASES? LEASING JOHN C. FUSCO, JR. CPA, MT
7
Slide 8
3 YEAR COPIER LEASE $400/MONTH OPERATING LEASE UNDER CURRENT
RULES TWO COMPANIES COMPANY J AND COMPANY F SAME LEASE TERMS/ SAME
EQUIPMENT/ FROM THE SAME LESSOR RESULT RENT EXPENSE $4,800/YEAR FOR
THREE YEARS FOR BOTH COMPANIES 8 LEASING JOHN C. FUSCO, JR. CPA,
MT
Slide 9
YEARCo. J (6%)CO. F(8%)CO. JCO. F ASSET LIABILITY Initial
13,148 12,765 13,148 12,765 1 8,766 8,510 9,025 8,844 2 4,383 4,255
4,648 4,598 3 0 0 0 0 9 LEASING JOHN C. FUSCO, JR. CPA, MT
Slide 10
YEARCO. JCO. FCO. JCO. FCO. JCO. F INT Amort.Amot.Total 1 677
880 4,383 4,2555,0615,134 2 422 554 4,383 4,2554,8054,809 3 152 202
4,383 4,2554,5354,457 Total 1,251 1,636 13,14812,76514,400 10
LEASING JOHN C. FUSCO, JR. CPA, MT
Slide 11
We need to classify our leases as: TYPE A LEASES a lease that
is expected to consume MORE than an INSIGNIFICANT portion of the
economic benefits embedded in the underlying asset. (things like
equipment, aircraft, cars and trucks); so in plain English the
lease is for a significant part of the assets useful life.
Notwithstanding the above requirements, if a lessee has a
significant economic incentive to exercise an option to purchase
the underlying asset, it is classified as a Type A lease. LEASING
JOHN C. FUSCO, JR. CPA, MT 11
Slide 12
TYPE B LEASES leases are classified as TYPE B if either of the
following criteria are met: Lease term is for an insignificant
portion of the total economic life of the underlying asset. OR
Present value of lease payments is insignificant relative to the
Fair Value of the underlying asset at commencement date. LEASING
JOHN C. FUSCO, JR. CPA, MT 12
Slide 13
If the underlying asset is property it is classified as Type B
property unless one of the following criteria are met: The lease
term is for the major part of the remaining economic life of the
underlying asset. OR The present value of the lease payments
accounts for substantially all of the Fair Value of the underlying
asset at commencement date. LEASING JOHN C. FUSCO, JR. CPA, MT
13
Slide 14
Lessee enters into a 15-year lease of an office building, which
has a remaining economic life of 40 years at the commencement date.
The lease calls for payments of $30,000 per year, the present value
of which is $300,000 using the lessee incremental borrowing rate.
The fair value of the property at the commencement date is
$400,000. Lessee determines the lease is a Type-B lease because: a.
The underlying asset is property b. Lease term is not for a major
part of the remaining economic life of the property (37.5% ) c. The
PV of the lease payments does not account for substantially all of
the Fair value of the property. (75% - 300,000/400,000) Your
thoughts on the above? LEASING JOHN C. FUSCO, JR. CPA, MT 14
Slide 15
Lessee would : Recognize a right-of-use asset and a lease
liability at the present value of lease payments. Recognize the
unwinding of the discount on the lease liability as interest
separately from the amortization of the right-of-use asset. LEASING
JOHN C. FUSCO, JR. CPA, MT 15
Slide 16
For most leases of property (that is land and/or building or
part of a building) the lessee would: Recognize a right-of-use
asset and a lease liability, initially measured at the present
value of lease payments. Recognize a single lease cost, combining
the unwinding of the discount on the lease liability with the
amortization of the right- of-use asset, on a straight-line basis.
LEASING JOHN C. FUSCO, JR. CPA, MT 16
Slide 17
For most leases of assets other than property, a lessor would
classify the lease as a Type A Lease and do the following:
Derecognized the underlying asset and recognize a right to receive
lease payments (the lease receivable) and a residual asset
representing the rights the lessor retains relating to the
underlying asset. Recognize the unwinding of the discount on both
the receivable and the residual asset as interest income over the
lease term. Recognize any profit relating to the lease at the
commencement date. LEASING JOHN C. FUSCO, JR. CPA, MT 17
Slide 18
For most leases of property, lessor would apply an approach
similar to existing operating lease accounting in which the lessor
would: Continue to recognize the underlying asset. Recognize lease
income over the lease term typically on a straight-line basis.
LEASING JOHN C. FUSCO, JR. CPA, MT 18
Slide 19
Both lessee and lessor would: Exclude most variable lease
payments Include payments to be made in optional periods only if
the lessee has a significant economic incentive to exercise an
option to extend or not to exercise an option to terminate. LEASING
JOHN C. FUSCO, JR. CPA, MT 19
Slide 20
At commencement date an entity assesses whether the lessee has
a significant economic incentive to exercise an option considering
all relevant factors, such as: a. Contractual terms and conditions
of the optional periods compared with current market rates such as:
1. The amount of lease payments in any optional period 2. The
amount of any variable lease payments or other contingent payments.
3. The terms and conditions of any options that are exercisable
after initial optional period such as a purchase option. LEASING
JOHN C. FUSCO, JR. CPA, MT 20
Slide 21
b. Significant leasehold improvements that are expected to have
significant economic value for the lessee when the option to extend
or terminate the lease or purchase the asset becomes exercisable.
c. Costs relating to the termination of the lease and signing a new
lease. d. The importance of that underlying asset to the lessees
operations. LEASING JOHN C. FUSCO, JR. CPA, MT 21
Slide 22
Basic definition: a contract that conveys the right to use an
asset (the underlying asset) for a period of time for
consideration. At inception of a contract, an entity shall
determine whether the contract is or contains a lease by addressing
both of the following: Whether fulfillment of the contract depends
on the use of an identified asset Whether the contract conveys the
right to control the use of the identified asset for a period of
time. LEASING JOHN C. FUSCO, JR. CPA, MT 22
Slide 23
Asset would usually be specifically identified in the contract.
However, even the asset is specifically identified fulfillment does
not depend on the use of an identified asset, if the lessor has the
substantive right to substitute the asset throughout the term of
the contract. LEASING JOHN C. FUSCO, JR. CPA, MT 23
Slide 24
Contract gives lessee the right to control the use of the
identified asset if throughout the term of the contract the lessee
has the right to do both of the following: a. Direct the use of the
identified asset. b. Derive the benefits from the use of the
identified asset. Lets look at some examples from ED2 of using the
criteria to determine if a contract contains a lease. LEASING JOHN
C. FUSCO, JR. CPA, MT 24
Slide 25
Contract between the lessee (Customer) and a freight carrier
(Carrier) for use of 10 rail cars of a particular specification
that are owned by the carrier and contracted for 5 years. Contract
specifies the type of car. Customer determines when, where and
which goods are transported using the cars. When cars are not in
use, they are kept at Customers premises and Customer can use them
for any purpose (such as storage) if it so chooses. If a particular
car needs service or repair Carrier is required to substitute an
equivalent car of the same type. Except in case of default, Carrier
can not retrieve the cars during the 5 years of the contract.
LEASING JOHN C. FUSCO, JR. CPA, MT 25
Slide 26
Carrier is required to provide and engine and driver when
requested by Customer. If Carrier is unable to provide Customer can
use another Carriers service. Carrier can transport Customers goods
along with other Customers goods on trains up to 100 cars.. RESULT:
The contract contains a lease, Customer had the right to use 10
cars for 5 years. Contract also contains a nonlease service
component that relates to the use of an engine and driver. Contract
does not convey the right to use an identified engine. LEASING JOHN
C. FUSCO, JR. CPA, MT 26
Slide 27
Customer has the right to control use of the cars because of
both of the following: A. Customer has the ability to drive the use
of the cars. Customer determines how, when, and for what purpose
the cars are used, not only when they are being used to transport
Customers goods but throughout the term of the contract. B.
Customer has the ability to derive the benefit from use of the
cars. The cars are available for Customers use throughout the term
of the contract, including when they are not being used to
transport Customers goods. LEASING JOHN C. FUSCO, JR. CPA, MT
27
Slide 28
Contract between Customer and carrier requires carrier to
transport a specified quantity of goods in accordance with a stated
timetable for a period of five years. The timetable and quantity of
goods specified is the equivalent of the Customer having the use of
10 rail cars for 5 years. Contract states the nature and quantitiy
of goods to be transported but does not include specific details of
the cars or engine to be used. Carrier had a large pool of similar
cars and can choose which cars to use and engines to use to fulfill
Customers requests. RESULT: The contract does NOT contain a lease.
LEASING JOHN C. FUSCO, JR. CPA, MT 28
Slide 29
The contract does not contain a lease because: 1. Fulfillment
of the contract does not depend on the use of 10 identified rail
cars or an identified engine. 2. Carrier has substantive
substitution rights, 3. Carrier can choose any cars without
Customers consent. 4. There are no economic barriers that prevent
Carrier from using any cars and engines in fulfillment of the
contract. LEASING JOHN C. FUSCO, JR. CPA, MT 29
Slide 30
Customer (the lessee) enters into a contract for coffee
services for two years with Suplier (lessor) Supplier puts 25
coffee machines in customers premise that are tailored for use with
consumables provided by Supplier. The coffee machines function only
with consumables provided by Supplier and have no use to Customer
other than when they are used in conjunction with those
consumables. Supplier is responsible for repairs and maintenance of
the coffee machines. Customers staff operate the machines,
selecting the coffee they wish to drink and the machines deliver
the coffee. RESULT: The contract does not contain a lease. LEASING
JOHN C. FUSCO, JR. CPA, MT 30
Slide 31
Although fulfillment of the contract may depend on the use of
the machines, the contract does not give the Customer the right to
control the use of the machines. Customer does not have ability to
derive benefits from the use of the machines on their own; the
machines function only with the consumables supplies by Supplier.
Machines are incidental to the delivery of coffee services to the
Customer over the two year term of the contract. Developers Note:
Most of these type contracts require a certain quantity of
consumables to be purchased by the Customer or the Supplier pulls
the machines out. For instance, typical machine today would be a
Keurig that uses K-cups that are available from many sources. The
Supplier will insist on purchase only from them and remove the
machines if they even suspect the Customer has used consumables
from another source. So, you have a service contract not a lease.
LEASING JOHN C. FUSCO, JR. CPA, MT 31
Slide 32
Customer (lessee) enters into a 15 year contract to use 3
specified, physically distinct dark fibers withina larger cable
connecting Hong Kong to Tokyo. Customer makes all the decisions
about the use of the fibers by connecting each end of the fibers to
its electronic equipment (that is the Customer lights the fibers).
If the fibers are damaged, Supplier is responsible for repairs and
maintenance. RESULT: The contract contains a lease. LEASING JOHN C.
FUSCO, JR. CPA, MT 32
Slide 33
Why does this contract contain a lease? One reason is that
fulfillment depends on use of the fibers that are explicitly
specified in the contract and are physically distinct from other
fibers within the cable. The Customer has the right to control the
use of the dark fibers because of the following: a. Customer has
the ability to direct the use of the dark fibers. Customer
determines how, when and to what purpose the fibers are used.
Accordingly, Customer makes the decisions about the use of the
fibers that most significantly affect the economic benefits derived
from use throughout the term of the contract. b. Customer has the
ability to derive the benefit from use of the dark fibers. The
fibers are available for Customers use throughout the 15 year term
of the contract, they can not be used by any other party unless
Customer agrees to such use. The contract also contains a non-lease
service component for repairs and maintenance of the fibers.
LEASING JOHN C. FUSCO, JR. CPA, MT 33
Slide 34
Customer enters into a 15 year contract for the right to use a
specified amount of capacity within a cable connecting Hong Kong to
Tokyo. The specified amoutis equivant to Customer having the use of
the full capacit yof 3 fiber strands within the cable (the cable
contains 15 fibers with similar capacities) Supplies makes
decisions about the transmission of data (that is, Supplier lights
the fibers and makes decisions about which fibers are used to
transmit Customers traffic). RESULT: the contract does not contain
a lease. LEASING JOHN C. FUSCO, JR. CPA, MT 34
Slide 35
The contract does not contain a lease because: 1. Supplier
makes all the decisions about transmission of Customers data, which
requires only a portion of the capacity of the cable. 2. That
capacity portion ids not physically distinct from the remaining
capacity of the cable. 3. Customer has contracted for the right to
capacity within a cable. It does not have the right to use an
identified asset. LEASING JOHN C. FUSCO, JR. CPA, MT 35
Slide 36
Date on which the lessor makes an underlying asset available
for use by a lessee. LEASING JOHN C. FUSCO, JR. CPA, MT 36
Slide 37
The noncancellable period of the lease, together with both of
the following: a. Periods covered by an option to extend the lease
if the lessee has a significant economic incentive to exercise that
option. b. Periods covered by an option to terminate the lease if
the lessee has a significant economic incentive not to exercise the
option. LEASING JOHN C. FUSCO, JR. CPA, MT 37
Slide 38
Payments made by lessee to a lessor relating to the right to
use the underlying asset during the lease term, consisting of the
following: a. Fixed payments, less any lease incentives received or
receivable from the lessor. b. Variable lease payments that depend
on an index or rate or are in substance a fixed payment c. The
exercise price of a purchase option if the lessee has significant
economic incentive to exercise that option. d. Payments for
penalties for terminating the lease if the lease term reflects the
lessee exercising the option to terminate. e. Non lease components
are not included f. Residual value guarantees are included. LEASING
JOHN C. FUSCO, JR. CPA, MT 38
Slide 39
The rate of interest that the lessee would have to pay to
borrow over a similar term, and with similar security, the funds
necessary to obtain an asset of similar value in a similar economic
environment. NOTE: Private companies can elect to use the risk-free
rate. Some treasury rates recently: 2year 0.27%; 5 year 0.77%; 10
year- 1.86% LEASING JOHN C. FUSCO, JR. CPA, MT 39
Slide 40
Lessors have always needed to record initial direct costs and
amortize them over the life of the lease. Now lessees must also
include initial direct costs in the right-of-use asset at
commencement of the lease. Initial direct costs are defines as:
Costs that are directly attributable to negotiating and arranging a
lease and would not have been incurred without entering into the
lease. LEASING JOHN C. FUSCO, JR. CPA, MT 40
Slide 41
For both lessees and lessors such items as: Commissions Legal
fees Evaluating the prospective lessees financial condition
Evaluating and recording guarantees, collateral, and other security
contracts Negotiating lease terms and conditions Payments made to
existing tenants to obtain the lease LEASING JOHN C. FUSCO, JR.
CPA, MT 41
Slide 42
1. General overhead, including for example depreciation,
occupancy and equipment costs, unsuccessful origination efforts,
and idle time 2. Costs related to activities performed by the
lessor for advertising, soliciting potential lessees, servicing
existing leases, or other ancillary activities. Question: What
about the controllers time reviewing, negotiating and setting up
the lease on the books? LEASING JOHN C. FUSCO, JR. CPA, MT 42
Slide 43
If there are observable standalone prices for each component of
the contract, lessee shall allocate the consideration to each
component on the basis of the relative standalone price of each.
Standalone price is the price at which a lessee would purchase the
component separately. After that allocation the remaining amounts
are considered lease components. This is likely in a maintenance
contract included with your lease payment. LEASING JOHN C. FUSCO,
JR. CPA, MT 43
Slide 44
Facts: 10 yr. lease, option for 5 more yrs. No incentive to
exercise so use 10 yr. as term. Borrowing rate 5.87% Initial direct
costs $15,000 Lease payments $50,000/yr initial term; $55,000/yr
extended term Paid beginning of year PV of 10, $50,000 payments at
5.87% $342,017 Pays first year at commencement At commencement
record DR Right-of-use (342,017+50,000+15,000) = 407,017 CR Lease
Liability 342,017 CR Cash (50,000+15,000) 65,000 LEASING JOHN C.
FUSCO, JR. CPA, MT 44
Slide 45
End of first year Type A lease: Interest (5.87*342,017)20,076
Lease liability 20,076 Amortization (402,017/10) 40,702
Right-of-use 40,702 Balances end of first year Right-of-use
(407017-40,702) = 366,315 Lease liability (342,017+20,076) =
362,093 LEASING JOHN C. FUSCO, JR. CPA, MT 45
Slide 46
Total lease cost: 10x50,000 = 500,000 + 15,000 = 515,000 Lease
expense per year = 51,500 (515,000/10) Entry: Lease expense 51,500
Lease liability 20,076 Right-of-use (51,500-20,076) 31,424 Next
years payment beginning of year: Lease liability 50,000 Cash 50,000
LEASING JOHN C. FUSCO, JR. CPA, MT 46
Slide 47
Lessee enters into a 5-year lease of equipment with annual end
of year lease payments of $59,000, no initial direct costs, option
to purchase for $5,000 at end of fifth year. Residual value of
equipment at end of 5 years is $75,000, therefore, significant
economic incentive to exercise the option. The fair value of the
equipment at commencement date is $250,000. The rate implicit in
the lease, that is the rate that makes the PV of payments including
the option to equal the FV is 6.33%. LEASING JOHN C. FUSCO, JR.
CPA, MT 47
Slide 48
Commencement date: Right-of-use 250,000 Lease liability 250,000
Right-of-use amortized over life of equipment 7yrs rather than
shorter life of lease. First year entry: Interest expense
(250,000*6.33%) 15,825 Lease liability 15,825 Amortization
(250,000/7) 35,714 Right-of-use 35,714 LEASING JOHN C. FUSCO, JR.
CPA, MT 48
Slide 49
Right-of-use asset (250,000-35,714)= 214,286 Lease liability
(250,000+15,825 59,000) = 206,825 The $59,000 is the payment that
was recoded as debiting Lease Liability and crediting cash at end
of year. LEASING JOHN C. FUSCO, JR. CPA, MT 49
Slide 50
Right of use asset (250,000-35417X5) = 71,430 Liability
remaining is $5,000 the purchase option which is then paid. The
Right-of-use asset gets reclassified to Property, Plant &
equipment as follows: PP&E 71,430 Right-of-use 71,430 Then the
lessee depreciates this amount over the remaining two years.
LEASING JOHN C. FUSCO, JR. CPA, MT 50
Slide 51
Lease term = 10 Years Annual payments = $100,000 paid beginning
of year Increase each year by increase in CPI for last 12 months At
commencement CPI = 125 end of year 1 = 128 Lessee Borrowing rate =
8% First payment made at commencement PV of remaining payments =
624,689 LEASING JOHN C. FUSCO, JR. CPA, MT 51
Slide 52
Right-of-use (624,689+100,000) 724,689 Lease liability 624,689
Cash 100,000 Lease cost is $1,000,000 (100,000*10) therefore entry
for first year is: Lease expense 100,000 Lease liability
(8%*624,689) 49,975 Right of use (100,000-49,975) 50,025 LEASING
JOHN C. FUSCO, JR. CPA, MT 52
Slide 53
With increase in CPI payments for the second year as 100,000 *
128/125 = 102,400 Adjust lease liability equal to difference
between PV of revised and the original payments. PV 9 payments at
2,400 at 8% = 16,192, entry Right-of-use 16,192 Lease liability
16,192 End of second year makes payment Lease liability 102,400
Cash 102,400 LEASING JOHN C. FUSCO, JR. CPA, MT 53
Slide 54
Same facts as previous example but lessee also must pay 2% of
sales of $1,200,000 or $24,000 Therefore expense for the year will
be $124,000 (100,000 + 24,000) entry would be Lease expense 124,000
Lease liability (8%*624,689) 49,975 Right-of-use (100,000-49,975)
50,025 Accrued variable lease payment 24,000 LEASING JOHN C. FUSCO,
JR. CPA, MT 54
Slide 55
BALANCE SHEET (STATEMENT OF FINANCIAL POSITION): 1.
Right-of-use assets separately from other assets 2. Lease
liabilities separate from other liabilities 3. Right-of-use assets
arising from Type A leases separately from right-of-use assets
arising from Type B leases 4. Lease Liabilities arising from Type A
leases separately from Lease Liabilities arising from Type B leases
LEASING JOHN C. FUSCO, JR. CPA, MT 55
Slide 56
If above not on Balance Sheet then Lessee does both of the
following; a. Present right-of-use assets within the same line item
as the corresponding underlying assets would be presented if they
were owned b. Disclose which line items in the statement of
financial position include right-of-use assets and lease
liabilities. STATEMENT OF COMPREHENSIVE INCOME a. Type A leases the
unwinding of the discount on the lease liability separately from
the amortization of the right-of-use asset b. Type B leases the
unwinding of the discount on the lease liability together with the
amortization of the right-of-use asset LEASING JOHN C. FUSCO, JR.
CPA, MT 56
Slide 57
STATEMENT OF CASH FLOWS a. Repayments of principal portion of
lease liability from Type A leases in Financing Activities b.
Unwinding of the discount on Type A leases as interest. c. Payments
arising from Type B leases in Operating Activities d. Variable
lease payments and short-term lease payments not included in lease
liability in Operating Activities LEASING JOHN C. FUSCO, JR. CPA,
MT 57
Slide 58
General information about companys leases and the significant
judgments made in applying these rules along with the amounts
recognized in the financial statements relating to those leases.
Level of detail should satisfy the disclosure objective which is to
enable users to understand the amount, timing, and uncertainty of
cash flows arising from leases. Disclosure should be quantitative
and qualitative. It should be aggregated or disaggregated so that
useful information is not obscured by including a large amount of
insignificant detail or by aggregating items that have different
characteristics. LEASING JOHN C. FUSCO, JR. CPA, MT 58
Slide 59
Disclose the following: a. Information about the nature of
leases, including: 1. A general description of these leases,
including 2. The basis and terms and conditions, on which variable
lease payments are determined. 3. The existence and terms and
conditions, of options to extend or terminate. Should disclose
narrative disclosure about the options that are recognized as part
of right-of-use and lease liability and those that are not. 4. The
existence and terms and conditions, of residual value guarantees
LEASING JOHN C. FUSCO, JR. CPA, MT 59
Slide 60
5. The restrictions or covenants imposed by leases and
information about sub-leases. Information about leases that have
not yet commenced but that create significant rights and
obligations Information about determinations of whether a contract
contains a lease, allocation between lease and non-lease components
and determination of the discount rate. LEASING JOHN C. FUSCO, JR.
CPA, MT 60
Slide 61
Disclose reconciliation of opening and closing balances of
lease liabilities separate for A an B Type leases, including a.
Liabilities created due to leases commencing or extended b.
Liabilities extinguished due to leases being terminated c.
Remeasurements relating change in an index or rate used to
determine lease payments d. Cash paid e. Foreign currency
translation gains and losses f. Effects of business combinations
GOOD NEWS-NONPUBLIC COMPANIES CAN ELECT NOT TO DISCLOSE THE ITEMS
ON THIS SLIDE LEASING JOHN C. FUSCO, JR. CPA, MT 61
Slide 62
Specific reliefs are permitted as follows: 1. Lessees and
lessors need not include initial direct costs in the measurement of
right-of- use asset or lease receivable 2. An entity can use
hindsight, such as in determining whether a contract contains a
lease, in classifying a lease, or in determining lease term if
lease contains options. 3. Lessees and lessors need only go back
and adjust leases for the earliest comparative year presented
rather than follow the rule of Topic 250 requiring going back as
far as possible where information is available. LEASING JOHN C.
FUSCO, JR. CPA, MT 62
Slide 63
The carrying amount just prior to the earliest comparative year
presented becomes the right-of-use asset and lease liability and
the leases are all considered Type A. Subsequent to the transition
measure the right-of-use asset and the lease liability as required
by the subtopic when adopted. LEASING JOHN C. FUSCO, JR. CPA, MT
63
Slide 64
5 Year lease for a vehicle at transition they are one year into
the lease. Lease payments at end of year remaining payments 1 at
$31,000 and 3 at $33,000 Borrowing rate at earliest comparative
period 6% Lease liability PV of 1 pay @31,000 and 3@33,000 at 6% is
$112,462 Determining the Right-of-use asset two steps Step 1
Determine the commencement date lease liability by taking the four
remaining payments average $32,500 PV 5 year annuity at 32,500 =
136,902 the commencement date lease liability. Step 2 Estimates the
right-of-use asset as $109,522 (136,522*4/5 year term) The
difference between the right- of-use asset and lease liability at
beginning of year 2 of the lease is an adjustment to opening
retained earnings LEASING JOHN C. FUSCO, JR. CPA, MT 64
Slide 65
Right-of-use 109,522 Retained earnings 2,940 Lease liability
112,462 Entity also had accrued rent for expense recorded but not
yet paid of $1,200 so another entry removes that amount: Accrued
Rent 1,200 Right-of-use 1,200 LEASING JOHN C. FUSCO, JR. CPA, MT
65
Slide 66
Assume numbers are the same as previous example only the
underlying asset is land, therefore, it is a Type B lease. Only
entries needed are: Right-of-use 109,522 Retained earnings 2,940
Lease liability 112,462 Accrued rent 1,200 Right-of-use 1,200
LEASING JOHN C. FUSCO, JR. CPA, MT 66
Slide 67
At commencement date the lease receivable should include: a.
Fixed payments less any incentives payable to the lessee b.
Variable lease payments that depend on an index or rate initially
measured at the index or rate at commencement date. c. Variable
lease payments that are in-substance fixed payments d. Lease
payments structured as residual value guarantees e. The exercise
price of purchase option if lessee has significant economic
incentive to exercise f. Payments for penalties for termination if
term reflects lessee exercising such option LEASING JOHN C. FUSCO,
JR. CPA, MT 67
Slide 68
Asset: Vehicle Term: 3 years Payments: $2,400/annual end of
year Initial Direct Costs: $200 Carrying Amount and Fair Value of
Vehicle: $10,000 Residual Value after 3 years: $4,500L Lessees
Options: Purchase at market after initial term or extend 2 years at
same payments Economic Life of Vehicle: 7 Years Lessor concludes no
economic incentive for lessee to exercise either option LEASING
JOHN C. FUSCO, JR. CPA, MT 68
Slide 69
Rate Implicit in Lease (makes PV of payments and Value at end
of term equal 6.87% Lease receivable: $6,513 PV 3 payments of
$2,400 at 6.87% plus initial direct costs of $200 Gross residual
Value: $3,687, expected value at end of term discounted at 6.87% No
difference in carrying value nor fair value so entry is as follows:
Lease receivable 6,513 Residual value 3,687 Vehicle 10,000 Cash for
initial direct costs 200 LEASING JOHN C. FUSCO, JR. CPA, MT 69
Slide 70
Imputed interest rate that will bring lease receivable to zero
is 5.18% which is used to calculate interest earnings during lease
term At end of year 1: Cash 2,400 Lease receivable 2,400 Lease
receivable 338 (5.18%*6,513) Residual asset 253 (6.87%*3,687)
Interest income (338+253) 591 LEASING JOHN C. FUSCO, JR. CPA, MT
70
Slide 71
End of year 1: Lease receivable (6,513-2400+338) 4,451 Residual
asset (3,687+253) 3,940 At end of the term: Lease receivable is
reduced to -0- Gross residual asset becomes 4,500 Interest on lease
receivable is 687 Interest income on residual asset 813 Total
interest income 1,500 LEASING JOHN C. FUSCO, JR. CPA, MT 71
Slide 72
End of term reclassifies residual asset to inventory: Inventory
4,500 Residual asset 4,500 Assume lessor sells the vehicle for
$5,000 Cash 5,000 Inventory 4,500 Gain on sale of inventory 500
LEASING JOHN C. FUSCO, JR. CPA, MT 72
Slide 73
Addition of a great number of assets and liabilities changes
the usual measurements of company liquidity and solvency. Lenders,
governmental units and other users need to be aware of these
changes Transition to putting all info on thebooks needs to be
carried out in an organized manner Systems may have to be changed
or modified greatly to accommodate these rules. Related party
transactions based on legal rights rather than in-substance rights.
Right-of-use asset, what exactly is it? LEASING JOHN C. FUSCO, JR.
CPA, MT 73