Catching up on June Results:

1.       Short Term Lessee Leases:

a.       The boards agreed to operating lease accounting for lessee leases with a maximum lease term (including renewal options) of 12 months or less. No asset or liability need be placed on the balance sheet, and rent expenses are recognized on a straight line basis over the lease term. (Lessees may choose to do full finance lease accounting if they wish. Disclosure of current rent and how representative that’s likely to be of the future was discussed.

 

2.       Subleases

a.       A head lease and sublease are to be accounted for as separate transactions, using normal lessee accounting for the head lease and lessor accounting for the sublease (using the right of use asset as the fundamental asset for the transaction, not the original underlying asset).

 

3.       Residual Value Guarantees

a.       The new standard calls for recognizing only the portion of any residual value guarantee that is expected to be payable, rather than the maximum amount. If there is a significant change in the expected relative value payable, an adjustment is required; the portion that applies to current or prior period s is recognized in profit or loss, while the right of us asset is adjusted for the portion applying to future periods.

 

Second Exposure Draft coming:

The most important news is that at the July 21st meeting, the boards unanimously decided to release a Second Exposure Draft. The changes to the proposed standard from the original Exposure Draft are so significant that they felt it important to get feedback from interested parties. Some decisions remain to be made before the new Draft can be released; they expect to complete those deliberations during Q3, with a new Draft released soon after. The wording seems to suggest that the Draft would come out in early October. Link

 

Additional decisions reached this month:

1.       Lessor Accounting:

a.       The performance obligation model has been scrapped. All leases (expect for short-term leases) will be accounted for using “receivable and residual” model, which is essentially the same as the “de-recognition approach” described in the Exposure Draft. Main points of this Model:

                                                              i.      The lessor recognizes a right to receive lease payments (matching the lessee’s obligation to make payments) and a residual asset.

                                                            ii.      The discount rate to present value the payments is the “rate the lessor charges the lessee” (the internal rate of return, based on the assets value).

                                                          iii.      The residual asset accretes (increases using the interest method, same interest rate) over the lease’s life.

                                                           iv.      If the asset’s carrying amount is lower than the lease’s value, a profit (on the portion of the asset represented by the lease receivable) can be recognized at commencement of the lease if reasonably assured.

 

2.       Short Term Leases:

                                                              i.      Defined as those with a maximum term of 12 months or less, will be accounted for as operating leases (no balance sheet effect, just income recognized over the lease term or a systematic basis, usually level). This will protect against needing to do convoluted accounting for things like rental cars and hotel rooms.

                                                            ii.      Operating lease accounting will also be permitted for leases of investment property measured at fair value.  

 

3.      Contingent Rents Depending on an Index or Rate

                                                              i.      While other contingent rents are excluded from the capitalized calculation of leases, those that depend on an index or rate have to be included. An example would be a lease whose rent is based on CPI or LIBOR. Such leases are to be initially measured based on the index/rate at the commencement of the lease, then recalculated at the end of each reporting period using the new index/rate. The change is booked to net income if it applies to the current reporting period, or as an adjustment to the right to use asset (for a lessee) for adjustment that related to future periods. Lessors would recognize n adjustment in the receivable in profit or loss.

                                                            ii.      This is a potentially significant cause of recalculations on leases; many real estate leases have CPI escalators that adjust ever year. The boards decided that the benefit of more accurate presentation of actual rents due outweighs the effort required.

 

4.       Lessee Disclosures: The boards approved a lengthy set of disclosures for lessees:

a.       Reconciliation of opening and closing balance of right to use assets, disaggregated by class of underlying asset.

b.      Reconciliation of opening and closing balance of lease liability (no disaggregation required)

c.       Future rent commitments, similarly to current FAS 13 requirements (by year for five years, then all remaining, then subtracting interest disclosed by year for more than 5 years, if that would provide better information.

d.      Information about leases signed but not yet started if they create “significant” rights and obligations

e.      Information about contingent rentals and options

f.        A table of expenses; amortization, interest, variable payments, and short term rents, plus a breakdown of principal and interest paid information regarding any expected material change in short term rentals.

However they explicitly are not requiring disclosure of discount rates, fair value of liabilities, purchase options, or initial direct costs. The also explicitly forbid combining interest and amortization expense are presenting the total as lease or rent expenses.

 

5.      Lessee primary financial statement presentation:

Lease right of use assets and liabilities either must be presented separately in the Statement of Financial Position balance sheet), or shown separately in footnote disclosures. The right of use asset is to be presented according to the type of underlying asset (land leases with land owned assets, etc.), They have decided not to define whether the right of use asset is tangible or intangible. This is a question that affects some regulated industries for tax and other purposes. The boards have decided to let the relevant regulatory bodies make the determination appropriate to their purposes.

 

a.       Statement of Cash Flows would show principle and interest payment in accordance with requirements for other financing. Variable lease payments (not capitalized) and short term rentals are operating cash flows. New leases (creating a new asset and liability) would be an additional non cash disclosure.