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Leases

Leases. Agenda. Background Lessee accounting Lessor accounting Identifying a lease Other aspects. Background. Why change accounting for leases?. Lessee Most assets and liabilities are off-balance-sheet Insufficient information about operating leases Lessor

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Leases

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  1. Leases

  2. Agenda • Background • Lessee accounting • Lessor accounting • Identifying a lease • Other aspects

  3. Background

  4. Why change accounting for leases? Lessee • Most assets and liabilities are off-balance-sheet • Insufficient information about operating leases Lessor • Lack of transparency about residual values $1.25 trillion of off-balance sheet undiscounted operating lease commitments for US public companies* * Estimate according to the 2005 SEC report on off-balance sheet activities

  5. How our proposals improve existing accounting Existing accounting issues How the proposals improves the accounting The proposals • Greater transparency about lessee’s leverage and the assets used in its operations • Most assets and liabilities are off balance sheet • Recognition of lease assets and liabilities for all leases of more than 12 months Lessee • Insufficient information provided about operating leases • Enhanced disclosures Lessee • Greater transparency • about residual values • Lack of transparency about residual values of equipment and vehicles Separately account for residual asset Enhanced disclosures about risk exposure to residual asset Lessor

  6. Lessee accounting model

  7. Proposed right-of-use model • Lessor • Lessee Right-of-use asset Lease payments

  8. Overview lessee accounting

  9. Recognition of assets and liabilities Definition of an asset: A resource controlled by an entity as a result of past events and from which future economic benefits are expected to flow to the entity. Control over right-of-use asset • Physical possession of (access to) leased asset • Lessor cannot retrieve leased asset Definition of a liability: A present obligation of the entity arising from past events, the settlement of which is expected to result in an outflow from the entity of resources embodying economic benefits. Unconditional obligation to pay • Lessee cannot return leased asset (terminate lease) and avoid paying without breaching contract

  10. Initial measurement

  11. Payments included in the lease liability Short-term leases Most excluded Variable lease payments Optional payments Residual value guarantees Included Fixed payments • Fixed payments • non-cancellable period • Residual value guarantees • expected amount Discounted

  12. Measurement simplifications • Short-term leases • Option to exclude leases of less than 12 months • Variable lease payments • Excluded if linked to sales or use • Included only if payments linked to index or rate • Options • Excluded unless significant economic incentive to exercise option Short-term leases Variable lease payments Optional payments Residual value guarantees Fixed payments

  13. Overview lessee accounting

  14. The consumption principle Start of lease End of lease 5-year lease part of asset consumed Equipment Asset consumption not more than insignificant Property (real estate)

  15. Lease classification

  16. Lessee accounting model Balance sheet Income statement Cash flow statement Type A Type B

  17. Lessee accounting–Example 17

  18. Disclosures lessee • * New disclosure compared to today for operating leases

  19. Lessor accounting model

  20. Overview lessor accounting

  21. Lessor accounting model Income statement Cash flow statement Balance sheet Type A Type B

  22. Example Type A lease 22

  23. Disclosures lessor • 1 For Type A leases only • 2 New disclosure compared to today for operating leases

  24. Identifying of a lease

  25. Definition of a lease Contract conveys the right to use an asset for a period of time in exchange for consideration

  26. Multi-element contracts Contract contains a lease • Allocation (lessee)* • Separation • Allocation between lease and non-lease components based on stand-alone prices • If stand-alone prices not available, lessee combines components and accounts for them as a single lease • Each lease component is accounted for as a separate lease * Lessor: allocate using revenue recognition guidance

  27. Other aspects

  28. Sale and leaseback Sale and leaseback? Use revenue recognition requirements to determine whether control of the asset has transferred to buyer yes no • Accounted for as sale and leaseback* • seller accounts for sale and applies lessee accounting • buyer accounts for purchase and applies lessor accounting • Adjusted for current market rates • Accounted for as a financing arrangement • seller continues to recognise the transferred asset and accounts for amounts received as financial liability • buyer accounts for amounts paid as receivable • Disclosures required: • Terms and conditions of sale and leaseback • any gains or losses arising from transaction

  29. Transition Modified retrospective approach* • Reliefs available • Simplifications • Carryover finance lease • Use of hindsight • No evaluation of initial direct costs for contracts before effective date • Lessee: use ‘portfolio level’ discount rate calculated at effective date • Modified approach based on information available at beginning of earliest comparative period • No requirement to make adjustments for leases currently classified as finance leases * Entity can choose to apply the new Leases standard retrospectively

  30. Next steps

  31. Thank you

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