need to know / leases - project update - BDO International
need to know / leases - project update - BDO International need to know / leases - project update - BDO International
2 LEASES - A PROJECT UPDATE TABLE OF CONTENTS Introduction 3 Existing guidance and the rationale for change 4 The IASB/FASB project to date 5 The main proposals 6 Definition of a lease 6 When would a contract contain a lease? 6 What would be the lease term? 6 What would be a ‘significant economic incentive’? 7 Scope 8 Contracts that contain lease and non-lease components 8 Lessee accounting 9 Initial recognition and measurement 9 Subsequent accounting 10 Accounting for the lease 11 Presentation 15 Lessor accounting 16 Recognition and measurement 16 ‘Operating lease’ approach 19 Presentation 19 Amounts included in lease payments 20 Variable lease payments 20 Purchase options 21 Residual value guarantees 21 Term option penalties 21 Reassessment of the discount rate 22 Short term leases 22 Sale and leaseback transactions 22 Disclosure 23 Consequential amendments – business combinations 24 Transition 25 Lessees 25 Lessor 25
LEASES - A PROJECT UPDATE 3 INTRODUCTION This publication sets out key proposals about the future of lease accounting, based on the most recent discussions of the IASB and the FASB during their joint project to revise the accounting requirements. If, as appears likely, the proposals are finalised on the basis of decisions taken to date, a wide range of entities will be affected. In summary: Lessees –– Lessees would record assets and liabilities for a wide range of leases that are currently not recognised on balance sheet –– For leases of items that are currently accounted for as operating leases, except for leases of real estate, the single amount currently included within operating results in the income statement will be split into operating and finance components –– For leases of real estate, although assets and liabilities will be recognised on balance sheet, the lease expense recognised in profit or loss will continue to be on the same basis as under IAS 17 Leases, in most cases resulting in a constant expense over the lease term. Lessors –– For many leases except most leases of real estate, lessors would adopt a ‘receivable and residual’ approach, with the leased asset being partially derecognised and a separate lease receivable being recognised –– For leases of real estate, in many cases an approach similar to operating lease accounting in accordance with IAS 17 would be retained. For some entities, the effect on their financial statements will be very significant, with this extending to include not only the statement of financial position (or balance sheet) but also their comprehensive income and cash flow statements. Although a finalised accounting standard is not expected to be effective on a mandatory basis before 2015, we now know enough about the IASB’s tentative decisions to have a fairly clear picture of the revised proposals. Given the extent of outreach and discussion with constituents, it appears likely that the revised exposure draft will contain many proposals that will be taken forward. Consequently, entities should start to assess the effect of the proposals on their financial statements, and in particular the consequent effect on related arrangements including: –– Lending agreements, including key ratios and covenants –– Employee remuneration arrangements, including bonus schemes linked to reported profits and share-based payments; and –– Investor communications. The revised exposure draft is expected to be issued before the end of 2012, with a comment period of 120 days.
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2 LEASES - A PROJECT UPDATE<br />
TABLE OF CONTENTS<br />
Introduction 3<br />
Existing guidance and the rationale for change 4<br />
The IASB/FASB <strong>project</strong> <strong>to</strong> date 5<br />
The main proposals 6<br />
Definition of a lease 6<br />
When would a contract contain a lease? 6<br />
What would be the lease term? 6<br />
What would be a ‘significant economic incentive’? 7<br />
Scope 8<br />
Contracts that contain lease and non-lease components 8<br />
Lessee accounting 9<br />
Initial recognition and measurement 9<br />
Subsequent accounting 10<br />
Accounting for the lease 11<br />
Presentation 15<br />
Lessor accounting 16<br />
Recognition and measurement 16<br />
‘Operating lease’ approach 19<br />
Presentation 19<br />
Amounts included in lease payments 20<br />
Variable lease payments 20<br />
Purchase options 21<br />
Residual value guarantees 21<br />
Term option penalties 21<br />
Reassessment of the discount rate 22<br />
Short term <strong>leases</strong> 22<br />
Sale and leaseback transactions 22<br />
Disclosure 23<br />
Consequential amendments – business combinations 24<br />
Transition 25<br />
Lessees 25<br />
Lessor 25
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