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Leasing Project Update

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During March 2014, the Financial Accounting Standards Board (FASB) and International Accounting Standards Board (IASB) (together the "Boards") resumed discussions on the joint project on accounting for leases. Several tentative decisions were reached that impact the direction of the project, which we previously discussed in MHM Messenger 2010-04, MHM Messenger 2013-15 and the September 2013 FAQ on the proposal.
The discussions have resulted in greater diversity in opinions by the FASB and IASB on lessee and lessor accounting, making it less likely the final standards issued by the Boards will be fully converged.

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Leasing Project Update

  1. 1. our roots rundeepTM Mayer Hoffman McCann P.C. – An Independent CPA Firm A publication of the Professional Standards Group MHMMessenger © 2 0 1 4 M ay e r H o f f m a n M c C a n n P. C . 877-887-1090 • www.mhmcpa.com • All rights reserved. TM During March 2014, the Financial Accounting Standards Board (FASB) and International Accounting Standards Board (IASB) (together the “Boards”) resumed discussions on the joint project on accounting for leases. Several tentative decisions were reached that impact the direction of the project, which we previously discussed in MHM Messenger 2010-04, MHM Messenger 2013-15 and the September 2013 FAQ on the proposal. The discussions have resulted in greater diversity in opinions by the FASB and IASB on lessee and lessor accounting, making it less likely the final standards issued by the Boards will be fully converged. Board Discussion Lessee Classification The May 2013 exposure draft (Exposure Draft) proposed two models for the classification of a lease. “Type A” leases for most equipment or vehicles that require capitalization of a right-of-use asset and recognition of a lease liability would require income statement recognition similar to a capital lease in existing literature (interest expense and depreciation expense).“Type B” leases for property that requires capitalization of a right-of-use asset and recognition April 2014 Leasing Project Update of a lease liability, which would require straight- line income statement recognition of the expense, presented in a single financial statement line item. During the March 2014 joint meeting, the IASB voted to support a “Type A” model for all leases. The FASB decided to change the lease classification test to be more in-line with current lease classification tests, using the two lease models of Type A and Type B. Lease Term The term of a lease in the Exposure Draft would include those options for renewal that had a significant economic incentive, which had raised questions about the consistency of the Exposure Draft with existing U.S. GAAP, which uses the term “reasonably assured.” The IASB decided on a higher threshold for the inclusion of an optional renewal than prposed in the Exposure Draft and both Boards agreed that the threshold should be a high standard. The Boards voted to support requiring that the lease term should only include those renewals that are reasonably certain (similar to “reasonably assured” in existing U.S. GAAP), thus aligning the Boards proposals with existing GAAP. The Boards also agreed that a lessee would reassess the lease term only when significant events occurred or circumstances changed that are caused by actions of the lessee, while a lessor would not reassess the lease term.
  2. 2. © 2 0 1 4 M ay e r H o f f m a n M c C a n n P. C . 877-887-1090 • www.mhmcpa.com • All rights reserved. MHMMessenger 2 The information in this MHM Messenger is a brief summary and may not include all the details relevant to your situation. Please contact your MHM auditor to further discuss the impact on your audit or audit report. Short-term Leases The Boards voted to retain the provision in the Exposure Draft to exempt leases with a term of less than 12 months. Similar to the lease term discussion above, the term of a shot-term lease would exclude optional renewals unless they were reasonably certain to be exercised. Small-ticket Items The Boards generally agreed that there should not be an explicit materiality threshold for the accounting for leases, but that using a portfolio approach would be acceptable. The IASB went further than the FASB in supporting the inclusion of an explicit provision permitting a portfolio approach and an explicit recognition exemption for small ticket leases. The majority of the FASB members indicated they did not believe explicit permission for using a portfolio approach was required and were concerned the inclusion of such a provision would establish a precedent that a portfolio approach can be used in other areas of U.S. GAAP only when explicitly permitted. In addition, the FASB did not support an explicit exemption for small leases, but additional research will be conducted by the FASB and IASB staff on the impact of such a provision in the U.S. for the FASB to discuss at a later date. Lessor Model Two approaches were supported by the Boards for lessor accounting. Approach 1 establishes a “Type A” or “Type B” lease, where a Type A is distinguished as those leases that are effectively a financing or a sale, as determined based on whether substantially all the risks and rewards incidental to ownership of the underlying asset are transferred by the lease arrangement. Approach 2 uses the same Type A and Type B leases, however precludes recognition of a selling profit and revenue for any Type A lease that does not transfer control of the underlying asset to the lessee. Approach 2 is considered to be consistent with the upcoming revenue recognition and was supported by the FASB. Approach 1 was supported by the IASB; however, the IASB will continue to consider the matter before finalizing a decision. In addition, the Boards eliminated the receivable and residual approach contained in the Exposure Draft for Type A leases. Rather, the lessor will apply lease accounting similar to current U.S. sales-type and direct finance lease accounting. What to Watch for The FASB and IASB staffs are continuing their research on the project and the Boards are expected to continue joint deliberations during the remainder of 2014. Expect further discussion on the treatment of small-ticket items as well as other questions raised in the 2013 Exposure Draft. The Boards have not yet announced a target date for the issuance of a final standard. For More Information If you have any specific questions, comments or concerns, please share them with James Comito or Hal Hunt of MHM’s Professional Standards Group or your MHM service professional. You can reach James at jcomito@cbiz.com or 858.795.2029 or Hal at hhunt@cbiz.com or 913.234.1012.

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