CHAPTER ONE: ARRIVING AT THE NEW STANDARDS
Leasing remains a popular form of financing due to the creative and flexible ways lease transactions can be structured. This creativity also contributes to its complexity, a complexity that is magnified by the multidisciplinary nature of leasing, as accounting, taxes, credit, finance and legal issues play a role in virtually every transaction. The inventiveness of the leasing industry, however, has created challenges for the accounting profession to keep abreast of the rules for properly recording and managing these increasingly multifaceted transactions.
This chapter addresses the evolution of the lease accounting standards worldwide and in the US into IFRS 16 and ASC 842 by focusing on the following topics:
- Leasing and Accounting
- Prior Guidance
- The Lease Accounting Project
- Scope of the Standards
- Differences Between the Standards
CHAPTER TWO: IDENTIFYING LEASES
The determination of when a lease was off the lessee’s balance sheet under prior lease accounting guidance was based on whether the lessor retained the risks and rewards of ownership in the arrangement or transferred them to the lessee. If the lease was considered an operating lease, neither the liability nor the asset associated with the lease was recognized in the lessee’s balance sheet.
Under IFRS 16 and ASC 842, all leases are now shown on the lessee’s balance sheet, so the only way to create total off-balance sheet financing for contracts that involve equipment is through some form of usage arrangement that does not contain a lease. This chapter examines the processes and requirements for determining when an arrangement does contain a lease and, therefore, must be shown in the lessee’s balance sheet, along with its ramifications. Topics addressed include:
- Various Definitions of a Lease
- Accounting Definition of a Lease
- Identified Assets
- Right to Control the Use
- Comprehensive Example
CHAPTER THREE: DEFINITIONS AND COMMON GUIDANCE
IFRS 16 and ASC 842 represent major changes to the lease accounting environment, as lessees now must capitalize all leases in the balance sheet. Other changes, such as those to the underlying processes, concepts and definitions that must be applied when accounting for leases, however, are much less pronounced.
This chapter examines the Standard’s general definitions and accounting requirements, such as lease payments and term, that are common to both lessors and lessees. These definitions and requirements serve as an essential foundation for application of the other lessee and lessor elements of the Standards. Topics addressed in this chapter include:
- Key Definitions and Terminology
- Lease Classification
- Lease Classification under 842
- Separating Lease and Non-lease Components
CHAPTER FOUR: LESSEE ACCOUNTING
IFRS 16 and ASC 842 require all leases to be capitalized in lessees’ financial statements, but they also address many other aspects of lessee accounting. Some of these overlap between lessors and lessees, including definitions, modifications and lessor classification criteria, but some rules and issues are specific to how lessees account for leases.
This chapter examines the requirements for booking and accounting for leases from the lessee’s standpoint and includes the following topics:
- General Requirements
- Booking the Lease
- Subsequent Measurement of the Lease
- Measuring Operating Leases under ASC842
- Comprehensive Example
- Other Lessee Accounting Issues
CHAPTER FIVE: LESSOR ACCOUNTING UNDER IFRS 16
IFRS 16 represents significant changes to the lease accounting environment, particularly as it applies to lessees. Its effect on lessors, however, is much less than on lessees as the IASB felt that lessor accounting was not broken and, therefore, did not require fixing.
This chapter examines the IFRS 16 requirements for booking and accounting for leases from the lessor’s standpoint, including when to recognize selling profit and operating lease depreciation. Topics addressed in this chapter include:
- Finance Leases
- Operating Leases
CHAPTER SIX: LESSOR ACCOUNTING UNDER ASC 842
The ASC 842 guidance represented significant changes to lessee accounting, with a much less pronounced effect on lessors. This is not to say that lessor accounting under ASC 842 remained unchanged, as some core concepts, such as classification, have been altered.
This chapter includes discussions of how lessors account for leases including the effect of terminations and other reporting issues. Topics include:
- Sales-type Leases
- Direct Financing Leases
- Operating Leases
CHAPTER SEVEN: SPECIALIZED ACCOUNTING CONSIDERATIONS
The appeal of leasing is that it provides creative solutions to customer financing problems and issues. These creative solutions, however, require a careful examination of the transaction’s characteristics in order to ensure that the accounting for them is proper. The lease accounting guidance of IFRS 16 and ASC 842 is comprehensive and considers the many situations that occur in leasing, no matter their form, even in those in which lessor and lessee roles may be reversed.
This chapter examines the lease accounting guidance for lease product variations into which lessors and lessees may enter, along with certain events that may occur during the life of a lease. Topics addressed in this chapter include:
- Leveraged Leases (ASC 842)
- Lease Modifications
CHAPTER EIGHT: IMPACT AND STRATEGIES
Whereas, IFRS 16 and ASC 842 detail the lease accounting requirements for both lessors and lessees, the primary impact of their adoption is on lessees, particularly relative to the prior lease accounting rules. These changes have created concerns amongst lessors as to the potential market ramifications and subsequent effect on customers’ leasing decisions.
This chapter examines the major impacts of IFRS 16 and ASC 842 on lessees and lessors, including the Standards’ financial statement ramifications for lessees and their operational effect. More importantly, how lessors must adapt their sales and marketing content to reflect the Standards’ consequences also is discussed, along with recommendations on ways to approach their customers. Topics addressed in this chapter include:
- Impact on Lessees and Lessors
- Lessor Marketing Strategies