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FASB Lease Accounting Standards


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The Financial Accounting Standards Board establishes standards of financial accounting that govern the preparation of financial reports in the private sector. This presentation outlines those standards for leases.

Published in: Real Estate

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FASB Lease Accounting Standards

  1. 1. October 7, 2010<br />Leases<br />Russ Golden<br />FASB Member<br />Danielle Zeyher<br />FASB Project Manager<br />This presentation has been prepared to help constituents understand the current status of projects of the FASB and IASB. The views expressed in this presentation are those of the presenter. Official positions of the FASB and the IASB are reached only after extensive due process and deliberations.<br />
  2. 2. Agenda <br />Overview of the FASB<br />Convergence with IASB<br />Summary of Proposed Guidance<br />Outreach Activities<br />2<br />
  3. 3. Overview of the FASB<br />The Financial Accounting Standards Board establishes standards of financial accounting that govern the preparation of financial reports in the private sector. <br />Standards are officially recognized as authoritative by the SEC and the State Boards of Accountancy <br />Source of Authoritative Standards<br />FASB Accounting Standards Codification<br />Mission of the FASB:<br />To establish and improve standards of financial accounting and reporting that foster financial reporting by nongovernmental entities that provides decision-useful information to investors and other users of financial reports.<br />3<br />
  4. 4. FASB Standards-Setting Process<br />Comprehensive and independent process that encourages broad participation and objectively considers all stakeholder views.<br />The FASB is committed to following an open, orderly process for setting standards – comprehensive due process procedures. <br />The process is designed to gather information from start to finish, and thereafter . . .<br />4<br />
  5. 5. Convergence: Improving quality and comparability of financial statements<br />High-Quality Global Standards<br />Improve and Converge<br />Improve and Converge<br />Existing<br />International Financial Reporting Standards<br />(IFRS)<br />Existing<br />US GAAP<br /><ul><li>Consistent with Section 108 of Sarbanes-Oxley Act and 2003 SEC Policy Statement
  6. 6. FASB priorities: (1) process; (2) improvement; (3) convergence</li></ul>5<br />
  7. 7. Norwalk Agreement and Memorandum of Understanding (MoU)<br />Describe what convergence means and the tactics used by the FASB and the IASB to achieve it. <br />Collaborate through joint projects to develop common standards. <br />The FASB issues those standards as US GAAP and the IASB issues them as IFRS<br />Overtime, the two sets of standards are expected to both improve quality and become increasingly similar if not the same<br />June 24, 2010 – FASB and IASB revised the strategies, plans and milestones for each project<br />6<br />
  8. 8. 7<br />
  9. 9. Proposed Lease Accounting<br />Project added to agenda July 2006<br />Discussion paper March 2009<br />Exposure Draft August 17, 2010<br />Comment period ends December 15, 2010<br />Outreach and fieldwork<br />FINAL STANDARD planned 2011<br />8<br />
  10. 10. Why did the FASB & IASB add the project<br />Rules are very complex and consist of several bright-line tests (difficult to define the dividing line between capital and operating leases)<br />Current operating lease accounting understates assets and liabilities and, consequently, indicators of leverage are understated and users adjust these indicators based on inadequate information in the notes<br />Increased focus on off-balance sheet financing<br />Global activity; we should have a converged standard with IASB<br />SEC’s off-balance sheet study <br />9<br />
  11. 11. Overall Project Objectives<br />To develop a new model for the recognition of assets and liabilities arising under lease contracts<br />Lessors and lessees present relevant, faithfully representative information about the rights and obligations arising from leases<br />To ensure that investors and other users of financial statements are provided useful, transparent, and complete information about leasing transactions in the financial statements<br />To assist users of financial statements in their assessment of the amounts, timing, and uncertainty of cash flows arising from leases<br />10<br />
  12. 12. Summary of Proposed Guidance<br />11<br />
  13. 13. Summary of main proposal<br />A lease is a contract in which right to use a specified asset is conveyed for a period of time in exchange for consideration<br />Lessees will account for all leases under the right-of-use approach, which records asset and liability for all leases<br />A hybrid accounting model will be required for lessors<br />Performance obligation approach for leases that expose lessor to significant risks or benefits associated with underlying asset<br />A (partial) derecognition approach would be applied to all other leases<br />
  14. 14. Scope<br />Lease definition – broad, but narrow in scope:<br />“A lease is a contract in which the right to use a specified asset (the underlying asset) is conveyed, for a period of time, in exchange for consideration.”<br />Apply this guidance to all leases, including leases of right-of-use assets in a sublease, except:<br />Leases of intangible assets<br />Leases to explore for or use minerals, oil, natural gas and similar non-regenerative resources<br />Leases of biological asset <br />Include:<br />Long-term leases of land<br />Non-core assets<br />Simplified accounting for short-term leases:<br />Lessee (optional): recognize gross asset and gross liability<br />Lessor (optional): use accrual accounting <br />13<br />
  15. 15. Lessee model<br />Lessee has acquired a right to use the underlying asset and is paying for that right with its lease payments<br />14<br />
  16. 16. Lessee measurement<br />15<br />
  17. 17. 16<br />Lessor model<br /><ul><li>Based on exposure to risks or benefits of the underlying asset during or subsequent to the expected term of the lease contract
  18. 18. Counterparty credit risk is not considered</li></ul>No<br />Yes<br />
  19. 19. Lessor model: Derecognition Approach<br />17<br />
  20. 20. Lessor Model: Performance Obligation Approach<br />18<br />
  21. 21. Renewal or purchase options<br />Purchase option is not recognized until exercised!<br />19<br />
  22. 22. Example – Lease Term<br />20<br />An entity has a lease that has a non-cancellable 10-year term, an option to renew for 5 years at the end of 10 years and an option to renew for an additional 5 years at the end of 15 years. Assume that the entity determines the probability for each term as follows: <br />There is a 60 percent chance that the term will be 15 years, which is the longest possible term more likely than not to occur. Therefore, the lease term is 15 years. <br />
  23. 23. Contingent rent, penalties and RVGs<br />21<br />
  24. 24. Example – Contingent Payments<br /><ul><li>Company A enters into an arrangement to lease a retail outlet in an office building.
  25. 25. 15-yr non-cancellable lease with no renewal options.
  26. 26. Annual lease payments of $2M/yr plus an additional contingent rent of 2% of gross revenue per year
  27. 27. Company A’s incremental borrowing rate is 8%
  28. 28. No purchase option or residual value guarantee </li></ul>Expected Contingent Rentals<br />Right-of-Use Asset/Obligation<br />
  29. 29. Disclosures<br />To enable users to evaluate the nature, amount, timing, and uncertainty of cash flows arising from lease contracts and how the entity manages those cash flows<br />Includes:<br />Nature of lease contracts<br />Nature and amount of significant subleases<br />Information about short-term leases<br />Maturity analyses<br />Significant assumption and judgments (including discount rate)<br />Lessee: reconciliation of right of use assets and liabilities; information about sale and leaseback transaction <br />Lessor: information about exposure to risks; impairment losses; reconciliation of (a) right to receive lease payments (b) lease liability (c) residual asset; class of residual assets; service obligations <br />23<br />
  30. 30. Transition<br />All outstanding leases at date of adoption<br />Simplified retrospective approach<br />Present value of remaining lease payments at:<br />Incremental borrowing rate at date of adoption (lessee)<br />Rate charged in the lease (lessor)<br />Date of adoption = earliest period presented in F/S<br />Scope exception for transition<br />“Simple” capital leases – carry forward prior accounting<br />Short term leases <br />24<br />
  31. 31. Outreach Activities<br />25<br />
  32. 32. Outreach<br />Meetings with constituents to discuss the lease proposal (individual companies, accounting firms, users of financial statements, conferences, etc.)<br />Webcasts and podcasts (IASB and FASB)<br />Preparer and User questionnaires on websites<br />Field work – workshops late November/early December<br />Roundtables – late December/early January<br />London, Hong Kong, Chicago, Norwalk<br />Working Group Meeting January 2011<br />26<br />
  33. 33. What we have heard so far<br />Lessees<br />Basic agreement with right-of-use model <br />Concern with:<br />Complexity in considering contingent rents and estimating lease term<br />Income statement impact (amortization and interest expense instead of rent expense)<br />Differentiating leases from services<br />Cost/benefits (non core assets, short-term leases)<br />Transition<br />27<br />
  34. 34. What we have heard so far<br />Lessors<br />Concern with:<br />Determining whether to apply the performance obligation or the derecognition approach<br />Complexity in considering contingent rents and estimating lease term<br />Income statement impact (no rental income for current operating leases)<br />Differentiating leases from services<br />Transition<br />28<br />
  35. 35. Project timeline<br />18<br />December 15, 2010<br />August 17, 2010<br />2011<br />Targeted outreach<br />Comment letters received<br />Boards’ re-deliberations<br />Final standard<br />Exposure Draft<br />Public<br />roundtables<br />To be held in London, Hong Kong, Chicago and Norwalk. <br />
  36. 36. To Learn More and Submit Feedback<br />30<br /><ul><li> FASB website:
  37. 37. Projects Tab
  38. 38. Leases
  39. 39. Press Release
  40. 40. FASB In Focus/IASB Snapshot
  41. 41. Podcast
  42. 42. Exposure Draft (FASB/IASB)
  43. 43. Comment Letters
  44. 44. Outreach/Fieldwork Info</li></li></ul><li>31<br />Questions or comments?<br />