Defining Issues  |   December 2018
 

FASB to propose more amendments to lessor accounting

Filed under: Leases

KPMG reports on leasing decisions made by the FASB at its December 4, 2018 meeting. The FASB decided to propose a change to how lessors that are not manufacturers or dealers determine fair value of the underlying asset for purposes of classifying and measuring the lease, and to require financial institution lessors in the scope of ASC 942 to present the principal portion of lessee payments as cash flows from investing activities in the statement of cash flows.

Applicability

  • Cash flow presentation. Lessors that are financial institutions in the scope of ASC 942 (financial services – depository and lending)
  • Fair value of underlying asset. Lessors that are not manufacturers or dealers who enter into sales-type or direct financing leases

Relevant dates

  • Proposed ASU expected to be issued near the end of 2018, with a comment letter period ending 15 days after issuance or January 15, 2019, whichever is later
  • For all entities, amendments would be effective for fiscal years beginning on or after December 15, 2019 (e.g. January 1, 2020 for an entity with a calendar year-end).
    • Entities would be allowed to early adopt the amendments concurrent with, or any time after, their adoption of ASC 842
    • Entities that adopt the amendments after they adopt ASC 842 would retrospectively apply the amendments from their ASC 842 adoption date

Key impacts

Lessor cash flow presentation

  • Lessors that are financial institutions in the scope of ASC 942 would present the principal portion of lessee payments made on sales-type or direct financing leases as cash flows from investing activities (consistent with the classification of similar cash flows from other lending activities), and all other lessee payments as cash flows from operating activities
  • All other lessors would continue to present all cash flows from lessee payments as cash flows from operating activities as required by ASC 842-30-45-5

Fair value of underlying asset.

  • For lessors that are not manufacturers or dealers, for purposes of classifying and measuring the lease, the fair value of the underlying asset at lease commencement would not be based on the definition of fair value in ASC 820. Instead, the fair value of the underlying asset would ordinarily be its cost, reflecting any volume or trade discounts that may apply, and including costs incurred to acquire the asset (e.g. sales taxes and delivery costs)
  • However, if a significant amount of time has lapsed from the asset acquisition date to lease commencement, the fair value would be based on the definition of fair value in ASC 820, which would generally result in a fair value that differs from the cost of the asset

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