The New Leasing Standard — Analysis and Application I (Portfolio 5125)

Bloomberg BNA Tax and Accounting Portfolio 5125, The New Leasing Standard — Analysis and Application I, is designed to be used in conjunction with Accounting Policy & Practice Portfolio 5126, The New Leasing Standard — Analysis and Application II. To access this Portfolio, visit Bloomberg Tax Financial Accounting Resource Center for a free trial. 

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This Portfolio is part of the Accounting Policy and Practice Series, an essential resource including more than 70 accounting Portfolios and the latest news and developments.

Description

Bloomberg BNA Tax and Accounting Portfolio 5125, The New Leasing Standard — Analysis and Application I, is designed to be used in conjunction with Accounting Policy & Practice Portfolio 5126, The New Leasing Standard — Analysis and Application II. Together, these Portfolios provide a detailed analysis of the new leasing standard (Accounting Standards Codification Topic 842and IFRS 16). This portfolio discusses the history of the standard, the changes that have been made to the Codification, the scope and effective date of the standard, transition to the new rules, identifying a lease, separating lease and non-lease components, allocating consideration in the contract, lease term, lease payments and classification. The Portfolio provides a comparison to current U.S. GAAP, when relevant, and discussion of the FASB's Basis for Conclusions.

Bloomberg BNA Tax and Accounting Portfolio 5126, The New Leasing Standard — Analysis and Application II discusses lessee accounting, lessor accounting, lease modifications, leveraged leasing, sale and leasebacks, and build-to-suit transactions. The Portfolio also includes guidance on disclosure requirements and preparing to implement the new standard.

This Portfolio may be cited as Bloomberg BNA Tax and Accounting Portfolio 5125, Sebik & Starczewski, The New Leasing Standard — Analysis and Application I (Accounting Policy and Practice Series).

Authors

Joseph P. Sebik, C.P.A.

Joseph P. Sebik, B.A., Director, Tax Reporting – Siemens Corporation; B.A. Accounting, Queens College of the City University of New York; work towards MBA, Controllership, St. Johns University; Certified Public Accountant, New York State; Chairman of the Federal Tax Committee of the Equipment Leasing & Finance Association (ELFA) since 2013, member of the Accounting Committee of the ELFA since 2000; recurring speaker at ELFA Accounting & Tax Conferences; author of numerous articles on leasing and accounting topics; over 35 years of lease accounting, financial structuring, tax reporting and financial reporting experience with Price Waterhouse; IBM Credit Corporation, Citicorp Global Equipment Finance, JPMorgan Capital and Siemens Financial Services; Co-Author Bloomberg BNA Tax and Accounting Portfolios 5114, Accounting for Leases: Fundamental Principles; 5117, Leases: Lessee Perspective, 5118, Leases: Lessee Perspective – Selected Topics; 5120, Leases: Lessor Perspective – Economics; 5128, Leases: Lessors – Classification and 5129, Leases: Lessors – Recording the Lease; 5174 VIE Consolidated Model: Identifying Variable Interests and Entities Considered VIEs and 5175 VIE Consolidation Model: Identifying Primary Beneficiary; Reporting and Disclosure Rules.

Lisa Marie Starczweski, Esq.

Lisa Marie Starczewski, Shareholder, Buchanan Ingersoll & Rooney; J.D. (summa cum laude), Villanova University School of Law; B.A. (magna cum laude), Smith College. Ms. Starczewski currently practices tax law with Buchanan Ingersoll & Rooney. Her practice focuses on corporate & partnership tax planning, leasing and installment sales. She previously practiced law in the tax departments of Morgan, Lewis & Bockius, and Schnader, Harrison, Segal & Lewis. Ms. Starczewski served as Editor-in-Chief of the Villanova Law Review (1987–88) and taught in the LL.M. program at Villanova University School of Law. She has authored several Bloomberg BNA Tax Management Portfolios in the U.S. Income Series, including 714 T.M., Partnerships—Allocation of Liabilities; Basis Rules and 565 T.M., Installment Sales. She has also authored Portfolios in the Accounting Series, including 5130, Equity Method Investments; 5098, The New Revenue Recognition Standard — Analysis & Application I; 5099, The New Revenue Recognition Standard — Analysis & Application II; 5114, Accounting for Leases: Fundamental Principles; 5117, Leases: Lessee Perspective; 5118, Leases: Lessee Perspective—Selected Topics; and 5120, Leases: Lessor Perspective—Economics. Ms. Starczewski is also the author and co-author of numerous Bloomberg BNA Tax Practice Series chapters. She is a frequent speaker at tax and accounting conferences. She has received the Tax Management Distinguished Author Award and is the Chair of the Bloomberg BNA Pass-Through Entities Advisory Board.

Table of Contents

Detailed Analysis
I. Summary of New Lease Accounting Rules
A. Background and Evolution of New Rules
B. Overview of Changes
1. New Codification Leasing Topic – ASC 842
2. Definition of Lease
3. Lessee Accounting
4. Lessor Accounting
5. Effective Date
C. GASB Reporting
D. This Portfolio
II. Scope & Effective Date
A. Scope of ASC 842
1. Property, Plant and Equipment
2. Noncore Assets
3. Long-Term Leases of Land
4. Subleases
5. Onerous Contracts
6. Embedded Derivatives
B. Applying ASC 842 at a Portfolio Level
C. No Exemption for “Low-Value” Assets
D. Election to Not Capitalize Short-Term Leases
E. Effect of New Rules on Existing Loan Covenants
F. Effective Date
III. Transition
Introductory Material
A. Modified Retrospective Approach
B. Practical Expedients
1. “Previous Conclusions” Practical Expedient – ASC 842-10-65-1(f)
2. “Hindsight” Practical Expedient - ASC 842-10-65-1(g)
3. Easements Practical Expedient
4.. Comparative Period and lessor revenue bifurcation Practical Expedient
5. Summary of Effect of Practical Expedients
C. Amounts Previously Recognized in Respect of Business Combinations
D. Lessee Transition Rules
1. Leases Previously Classified as Operating Leases under ASC 840
2. Leases Previously Classified as Capital Leases under ASC 840
E. Lessor Transition
1. Leases Previously Classified as Operating Leases Under ASC 840
2. Leases Previously Classified as Direct Financing or Sales-Type Leases Under ASC 840
3. Leases Previously Classified as Leveraged Leases Under ASC 840
F. Sale-Leaseback Transition
G. Transition Planning
1. Whether to Elect the “Previous Conclusions” Practical Expedient
2. Whether to Elect the “Hindsight” Practical Expedient
H. Reasons to Evaluate Existing Leases
I. Examples
1. Lessee Accounting for Leases Previously Classified as Operating Leases Under ASC 840 With Practical Expedients Elected
2. Lessee Accounting for Leases Previously Classified as Operating Leases Under ASC 840 Without Practical Expedients Elected
IV. Identifying a Lease
A. Definition of a Lease
B. Right to Control Use of Identified Asset
1. What Is an “Identified Asset?”
a. Substantive Substitution Rights
b. Agreements Conveying Use of a Portion of an Asset
2. Right to Control Use
a. Right to Obtain Substantially All Economic Benefits From Use
b. Right to Direct Use
(1) Decisions Predetermined Before Period of Use
(2) Effect of Protective Rights
c. Joint Operation/Arrangement
d. Control of Identified Asset for Portion of Contract Term
3. Differentiating Leases From Service Contracts
C. When Is an Entity Required to Reassess Existence of a Lease?
D. Examples – Identification of a Lease
1. Lease or Capacity Agreement - Fiber-Optic Cable (1)
2. Lease or Capacity Agreement - Fiber-Optic Cable (2)
3. Lease or Capacity Agreement - Fiber-Optic Cable (3)
4. Lease or Concession Agreement - Space in Airport (1)
5. Lease or Concession Agreement - Space in Airport (2)
6. Fractional Share of an Aircraft
V. Separating Lease and Non-Lease Components
A. Requirement to Separate Lease Components From Non-Lease Components
B. Separating Lease Components
1. What Is a “Component”?
2. When Is a Component Considered “Separate”?
3. Special Rule - Right to Use Land
4. Practical Expedient – Lessee Election Not to Separate Components
5. Payments for Taxes and Insurance
C. Residual Value Guarantees – Interaction With Derivatives Guidance
VI. Allocating Consideration in the Contract
A. Requirement to Allocate
B. What Is Included in “Consideration?”
C. Lessee Allocation Rules
1. Initial Allocation
2. Requirement to Remeasure and Reallocate
D. Lessor Allocation Rules
1. Initial Allocation
2. Requirement to Remeasure and Reallocate
VII. Lease Term and Lease Payments
A. Initial Measurement of Lease Term
1. General Definition of Lease Term
2. The “Reasonably Certain” Threshold
3. Fiscal Funding Clauses
B. Initial Measurement of Lease Payments
1. General Definition of Lease Payments
2. Lease Incentives
3. In-Substance Fixed Payments
4. Leasehold Improvements
5. Purchase Options
6. Variable Payments
a. What Variable Payments are Included in Lease Payments?
b. Reassessment of Variable Payments Dependent Upon an Index or Rate
7. Guarantees and Indemnifications
a. General Rules
b. Residual Value Guarantees
c. Asset Retirement Obligations
d. Indemnification for Tax Benefits
8. Initial Direct Costs
C. Subsequent Measurement
1. Lessee Reassessment of Lease Term and Purchase Options
2. Lessor Reassessment of Lease Term and Purchase Options
3. Lessee Re-measurement of Lease Payments
4. Lessor Re-measurement of Lease Payments
VIII. Classification
A. When Does an Entity Classify a Lease?
B. When is Reassessment of Classification Required?
C. Related Party Lease
D. Requirement to Combine Contracts
E. Lessee Classification
1. Finance Lease
a. Transfer of Ownership Criterion
b. Purchase Option Criterion
c. Remaining Economic Life Criterion
d. Present Value of Lease Payments Criterion
e. Alternative Use Criterion
f. Special Rules - Leases Involving Facilities Owned by a Government Unit or Authority
g. Effect of Lessee Indemnification for Environmental Contamination
2. Operating Lease
F. Lessor Classification
1. Sales-Type Lease
2. Direct Financing Lease
3. Operating Lease

Working Papers

TABLE OF WORKSHEETS
Worksheet 1 FASB Flowchart for Determination of Whether an Arrangement Contains a Lease