Transcript Title / divider screen title

International Financial Reporting Standards
Leases: Project update
United Leasing Association
(Russia)
April 2012
The views expressed in this presentation are those of the presenter,
not necessarily those of the IASB or IFRS Foundation.
© 2012 IFRS Foundation. 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
Why a leases project?
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• Existing lease accounting does not meet users’ needs
– accounting depends on classification
– contractual rights and obligations (assets and liabilities)
are off balance sheet
– users forced to adjust financial statements
• Complexity
– dividing line between finance and operating is arbitrary
– is there an underlying principle?
Where we are
2009
2010
3
2012
TBD
March 2009
Discussion Paper
Leases: Preliminary
Views
August 2010
Exposure Draft
Leases
H2 2012
Second Exposure
Draft
Leases
TBD
Final Standard
Leases
Comment period 4
months
Comment period 4
months
Re-expose proposals
302 comment letters
received
786 comment letters
received
Effective date: TBD
Will contain guidance
for both lessees and
lessors
Primarily focused on
lessee accounting
Contained proposals
for both lessees and
lessors
Focus on revisions to
2010 proposals
Will contain proposals
for both lessees and
lessors
Proposed right-of-use model
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• A lease contract is one in which the right to control the
use of an underlying asset is transferred from the
lessor to the lessee.
Lessor
Right of use
Lessee
2010 ED proposals for lessees
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• Right of use accounting model: Lessee has acquired
the right to use an underlying asset and is obligated to
pay for that right with its lease payments.
Right of use model for lessees
Balance Sheet
Income Statement
Right-of-use asset
X
Amortisation expense
X
Liability to make lease
payments*
X
Interest expense
X
* Discount at rate lessor charges the lessee or lessee’s incremental borrowing rate if lessor
rate not available.
Why a right-of-use model?
• Reflects assets and liabilities arising in leases on
the balance sheet
• Consistent with Conceptual Framework’s definition
of assets and liabilities
• One accounting model for all leases – consistency
and comparability
• Can be applied to all leases without arbitrary
‘bright lines’
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Redeliberations–lessee model
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• General support for a right-of-use model
– Basic lessee accounting principle widely accepted, ie
leases create assets and liabilities
• Feedback
– ‘front-loading’ expense in P&L
– elimination of rent expense
• Considered a dual accounting approach
– finance lease (in-substance purchase)–as ED
– other than finance lease (operating lease)–on balance
sheet, but straight-line rental expense
• Discussion to eliminate frontloading reopened in
February 2012
Feb 2012: Lessee accounting approaches
Approach A:
retain
current
tentative
decisions
(model
proposed in
2010 ED)
Use different amortisation
method for ROU asset
Approach B:
interestbased
amortisation
Approach C:
underlying
asset
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2010 ED–lessor accounting
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Does the lessor retain significant risks or benefits
of the underlying asset?
No
Derecognition approach:
• Derecognise underlying asset
• Recognise residual asset
• Profit on amount derecognised
and interest income
Yes
Performance obligation approach:
• Recognise underlying asset
• Recognise performance
obligation
• Lease income, depreciation and
interest income
Both approaches: recognise lease receivable
Redeliberations–lessor model
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All leases (except short-term leases and leases of investment property)
Balance Sheet
Income Statement
Right to receive lease
payments*
X
Profit on transfer of right-of-use
(gross or net based on business
model)
X
Residual asset**
X
Interest income—on receivable and
residual***
X
*Plus initial direct costs
** Measured at an allocation of carrying amount of underlying asset
*** Interest on residual based on estimated residual value—any profit on the residual asset is
not recognised until asset sold or re-leased at end of lease term.
Redeliberations–investment property
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Leases of investment property (IP)
Balance Sheet
Investment property *
Income Statement
X
Rental income **
X
Depreciation ***, or
Fair value changes ****
(X)
X/(X)
Accounted for similar to today
* Lessor measures IP at fair value or cost
** Rental income recognised on a straight-line basis or another systematic
basis, if more representative of pattern of earning rentals
***If IP measured at cost, rental income plus depreciation recognised
**** If IP measured at fair value, rental income plus fair value changes
recognised
Application example–equipment
lease
• Assumptions and workings:
Fair value of leased asset
CU1,000
Carrying amount of
leased asset
CU950
Lease term
5 years
Residual (future value)
CU500
Residual (present value)
CU374
Rents (annual in arrears)
Rate implicit in lease
Initial direct costs
PV of lease payments =
Lease receivable
CU149
6%
none
CU626
Total profit on
transaction = FV
of UA – CA of UA
1,000 - 950 = 50
Profit on ROU =
lease rec/FV of
UA * Total profit
626/1,000 * 50 = 31
Unearned income
(profit relating to
residual) = total
profit – profit on
ROU
50 – 31 = 19
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Application example–equipment
lease continued
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Periods
Balance sheet
0
1
2
3
4
5
Receivable
626
515
397
273
140
0
Gross residual asset
Unearned income
374
(19)
396
(19)
420
(19)
445
(19)
472
(19)
500
(19)
Net residual asset
355
377
401
426
453
481
Income statement
Gain on sale
Interest on receivable
Unwinding interest for residual asset
31
-
38
22
31
24
24
25
16
27
8
28
Total lease income
31
60
55
49
43
37
Reducing complexity and cost
Options to
extend the
lease term
(term options)
Variable lease
payments
Short–term
leases (lease
term ≤ 12
months)
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2010 ED
Post-ED simplifications
•
Longest possible lease
term more likely than
not to occur
•
Option period included if lessee has
significant economic incentive to
exercise
•
Reassessed
•
Reassessed other than for market
conditions
•
Included in lease liability •
on probability-weighted
basis
•
Reassessed
•
Liability/asset
recognised with no
discounting
Excluded from liability (unless insubstance fixed or based on an
index or rate) and accounted for as
occurred
•
Reassessed for spot/index
•
No liability/asset recognised
•
Rent expense
•
IAS17 operating lease model
Redeliberations–definition of a lease
• ‘Contract in which the right to use an asset (the
underlying asset) is conveyed, for a period of time, in
exchange for consideration’
– underlying asset=identifiable (physically distinct)
– right to control use of underlying asset
• Notion of control changed
– ‘ability to direct the use’ and receive benefits
– change from EITF 01-8/IFRIC 4/ED:
if entity obtains substantially all output ≠ control
– pricing does not determine control
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Redeliberations–lessee other issues
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• Multi-element contracts
– separately account for non-lease elements
– allocate between lease and non-lease elements if there
are observable prices
• Lessee residual value guarantees
– include in lease payments amounts expected to be
payable
• Sale and leaseback transactions
– if sale, account for as sale then leaseback
Redeliberations–lessor other issues
• Impairment
– financial asset impairment guidance for receivable
– non-financial impairment guidance for residual asset
• Residual value guarantees
– not recognised separately
– considered when assessing residual asset for
impairment
• Multi-element contracts
– separately account for non-lease elements
– allocate using revenue guidance (selling price)
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Redeliberations–lessee presentation
• Balance sheet
– RoU asset presented as if owned
– Liability to make lease payments
• Statement of cash flows
– principal  financing
– interest  as other interest payments are presented
– variable lease payments not included in RoU asset:
 operating
– short-term lease payments operating
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Redeliberations–lessor presentation
• Balance sheet
Receivable
Residual
Lease assets
on the face or notes
on the face
• Statement of cash flows
– cash inflows from leases  operating activities
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Redeliberations–lessor disclosure
• Reconciliation of lease receivable and residual asset
• Maturity analysis
• A table of all lease income, including short-term
• Details of contingent rentals and options
• Details of purchase options
• Details on residual asset risk management including
quantitative exposure
• Similar requirements for investment property lessors
scoped out of receivable and residual approach
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Redeliberations–transition
• 2010 ED proposals gave rise to front-loading for
lessees
• Revised approach
– Retrospective application
with simplifications in determining the rate and
calculations
– Use of hindsight
– Grandfathering of finance leases
– Option to apply without simplifications
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What happens next?
2-3Q
2012
H2
2012
22
2012
TBD
Redeliberations
Publish Revised
Exposure Draft*
Consultation
Issue Final
Standard
Outreach
Comment letter
period TBD
Outreach
Effective date:
TBD
Redeliberations –
lessee
subsequent
measurement
Working group
meetings
Redeliberations
Where to go for more information
IASB website
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www.ifrs.org
Contact details
Project team
Patrina Buchanan
Aida Vatrenjak
[email protected] [email protected]
Investor liaison
Jess Lion
Hilary Eastman
[email protected]
[email protected]
Questions or comments?
Expressions of individual
views by members of the
IASB and
its staff are encouraged.
The views expressed in
this presentation are those
of the presenter. Official
positions of the IASB on
accounting matters are
determined only after
extensive due process
and deliberation.
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