Proposed Changes to Lease Accounting:<br />
Major Changes for Lessee’s:<br />Almost all leases will be accounted under a method similar to how we currently account fo...
Major Changes for Lessee’s (continued):<br />A “right-of-use” asset will now be recorded on the balance sheet, representin...
Subsequent periods: “Right-of-Use” Asset<br />“Right-of-use” asset will be treated in a similar manner to fixed assets:<br...
Subsequent Periods:Lease Liability<br />The lease liability is treated similarly to how we currently account for capital l...
Basic Lease Example:<br />Inception: 1/1/10<br />3 year lease<br />$1,000 monthly payments<br />6.5% incremental borrowing...
Balance Sheet Changes:<br />
Income Statement Changes:<br />
Expense Comparison:<br />
Financial Statement Impact of New Rules: 12/31/2010<br />
Financial Statement Impact<br />
Changes for Lessors:<br />Two accounting models for Lessors<br />Performance obligation approach (MOST REAL ESTATE LEASES)...
How Will This Impact Commercial Real Estate?<br />Will companies shy away from long-term leases?<br />Two reasons they sho...
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Proposed Changes To Lease Accounting

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The proposed new lease accounting rules will have a significant impact on the accounting for leases that were previously recorded as operating leases. This presentation explores the impacts of the proposed changes.

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Proposed Changes To Lease Accounting

  1. 1. Proposed Changes to Lease Accounting:<br />
  2. 2. Major Changes for Lessee’s:<br />Almost all leases will be accounted under a method similar to how we currently account for capital leases<br />Effectively eliminates all operating leases<br />Expected exclusions:<br />Leases with terms less than 12 months<br />Immaterial Leases<br />Leases for intangibles assets, leases to explore or use minerals, oil, or natural gas, and leases of biological assets.<br />
  3. 3. Major Changes for Lessee’s (continued):<br />A “right-of-use” asset will now be recorded on the balance sheet, representing the companies right to the leased asset over the term of the lease.<br />A liability for the lease obligation will also be recorded on the balance sheet (INCLUDING expected renewal of options to extend).<br />Both the “right-of-use” asset and the lease obligation liability are recorded at the present value of future lease payments based on the company’s incremental borrowing rate.<br />
  4. 4. Subsequent periods: “Right-of-Use” Asset<br />“Right-of-use” asset will be treated in a similar manner to fixed assets:<br />The expected lease term will be the useful life used for amortization.<br />“Right-of-use” assets as well as the related amortization expense will be separately identified in the financial statements<br />Rent expense is essentially replaced by amortization expense.<br />
  5. 5. Subsequent Periods:Lease Liability<br />The lease liability is treated similarly to how we currently account for capital lease obligations. <br />When lease payments are made, the payment is split between a reduction of the lease obligation liability and interest expense (just like a mortgage payment).<br />The lease liability obligation will be separately identified on the balance sheet.<br />
  6. 6. Basic Lease Example:<br />Inception: 1/1/10<br />3 year lease<br />$1,000 monthly payments<br />6.5% incremental borrowing rate:<br />PV of Cash Flows: $32,627.49<br />Journal Entry:<br />Right-of-Use Asset $ 32,627<br />Short-term lease liability 10,178 <br />Long-term lease liability 22,449<br />
  7. 7. Balance Sheet Changes:<br />
  8. 8. Income Statement Changes:<br />
  9. 9. Expense Comparison:<br />
  10. 10. Financial Statement Impact of New Rules: 12/31/2010<br />
  11. 11. Financial Statement Impact<br />
  12. 12. Changes for Lessors:<br />Two accounting models for Lessors<br />Performance obligation approach (MOST REAL ESTATE LEASES)<br />If the lessor retains significant risk or benefits from the underlying assets, the lessor would retain the leased assets on the lessor’s books, record a receivable and a corresponding performance liability (i.e. deferred revenue).<br />NOT a significant change to the current method used for lessor accounting.<br />Derecognition approach<br />If no significant risk or benefit is retained by the lessor, then the leased assets are removed from the books of the lessor, with the only remaining asset being a residual amount representing the rights to the asset at the end of the lease.<br />
  13. 13. How Will This Impact Commercial Real Estate?<br />Will companies shy away from long-term leases?<br />Two reasons they shouldn’t<br />1 – Renewals options expected to be exercised are required to be included when booking initial liability. Company auditors will watch this closely.<br />2 – Economic substance of the transaction should still be the main driver…..not the accounting. If entering a long-term lease makes economic sense, that’s what should be done unless there are other factors to consider (i.e. bank covenants).<br />Other Concerns?<br />

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