The New Leasing Standard — Analysis and Application II (Portfolio 5126)

Bloomberg BNA Tax and Accounting Portfolio 5126, The New Leasing Standard — Analysis and Application II, is designed to be used in conjunction with Accounting Policy & Practice Portfolio 5125, The New Leasing Standard — Analysis and Application I. 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 5126, The New Leasing Standard — Analysis and Application II, is designed to be used in conjunction with Accounting Policy & Practice Portfolio 5125, The New Leasing Standard — Analysis and Application I. Together, these Portfolios provide a detailed analysis of the new leasing standard (ASU 2016-02 and IFRS 16). This portfolio 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. 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 5125, The New Leasing Standard — Analysis and Application I 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.

This Portfolio may be cited as Bloomberg BNA Tax and Accounting Portfolio 5126, Sebik & Starczewski, The New Leasing Standard — Analysis and Application II (Accounting Policy and Practice Series).

Authors

Joseph P. Sebik, C.P.A.

Joseph P. Sebik, B.A., Director, Tax Reporting – Siemens Corporation; Accounting, Queens College of the City University of New York (1977); work towards MBA, Controllership, St. Johns University; Certified Public Accountant, New York State (1980); 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 30 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.

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. Overview of Changes
1. New Codification Leasing Topic – ASC 842
2. Definition of Lease
3. Lessee Accounting
4. Lessor Accounting
5. Effective Dates
B. This Portfolio
II. Lessee Accounting
A. Recognition
1. On Commencement Date
a. Recognition of Right-of-Use Asset and Lease Liability
b. Accounting for Maintenance Deposits
c. Leases Denominated in a Foreign Currency
2. Election – Short-Term Leases
3. After Commencement Date
a. Finance Leases
b. Operating Leases
c. Recognition of Costs From Variable Lease Payments
B. Initial Measurement of Lease Liability and ROU Asset
C. Subsequent Measurement
1. Finance Lease
2. Operating Lease
3. Remeasurement of Lease Liability
4. Impairment of Right-to-Use Asset
5. Amortization of Leasehold Improvements
D. Examples
1. Example (1): Operating Lease
2. Example (2): Operating Lease with Lessee Residual Value Guarantee
3. Example (3): Finance Lease
E. Subleases
F. Derecognition
1. Lease Termination
2. Purchase of the Underlying Asset
3. Subleases
G. Presentation
1. Statement of Financial Position
2. Statement of Comprehensive Income
3. Statement of Cash Flows
H. Lessee Disclosure Requirements
1. Disclosure Requirements Between Inception and Commencement Date
2. General Objective
a. Information Regarding Leases
b. Information Regarding Significant Assumptions and Judgments
c. Information Regarding Amounts Recognized in the Financial Statements
d. Lease Transactions Between Related Parties
e. Short-Term Leases
f. Practical Expedient Regarding Separation of Lease and Nonlease Components
III. Lessor Accounting
A. Accounting Substantially Similar to Prior U.S. GAAP
B. Recognition
1. Sales-Type Leases
2. Direct Financing Leases
3. Operating Leases
C. Initial Measurement
1. Sales-Type Lease
2. Direct Financing Lease
3. Operating Lease
D. Subsequent Measurement
1. Sales-Type and Financing Leases
a. Subsequent Measurement of Net Investment in the Lease
b. Remeasurement of Net Investment in the Lease
c. Impairment of Net Investment in the Lease
d. Lease Receivables Held for Sale
e. Accounting for Underlying Asset at the End of the Lease Term
2. Operating Leases
3. Subleases
E. Derecognition
1. Sales-Type and Direct Financing Leases
a. Lease Termination
b. Subleases
c. Third Party Acquisition of Residual Value of Underlying Asset
F. Presentation
1. Sales-Type and Financing Leases
a. Statement of Financial Position
b. Statement of Comprehensive Income
2. Operating Leases
a. Statement of Financial Position
b. Statement of Cash Flows
G. Lessor Disclosure Requirements
1. General Requirements Relevant to All Leases
a. General Objective
b. Information Regarding Leases
c. Information Regarding Significant Assumptions and Judgments
d. Information Regarding Amounts Recognized in the Financial Statements
2. Requirements Specific to Sales-Type and Direct Financing Leases
3. Requirements Specific to Operating Leases
H. Sales of Equipment With Guaranteed Minimum Resale Amount
IV. Lease Modifications
A. When is a Lease Modification Accounted for as a Separate Contract?
B. Lessee Accounting for Modification Not Accounted for as Separate Contract
C. Lessor Accounting for Modification Not Treated as Separate Contract
D. Lease Modifications in Connection With Refunding Tax-Exempt Debt
E. Master Lease Agreements
F. Examples – Modifications Not Accounted for as Separate Contracts
1. Lessee
a. Increase in Lease Term
(1) No Change in Lease Classification
(2) Change in Lease Classification
b. Additional Right of Use
c. Decrease in Scope
d. Change in Lease Payments Only
2. Lessor
a. Modification of Operating Lease
(1) No Change in Lease Classification
(2) Change in Lease Classification
b. Modification of Direct Financing Lease
V. Leveraged Leasing
A. New Rules Eliminate Leveraged Lease Accounting
B. Transition
C. Commencement Date Prior to Effective Date of New Rules – ASC 842-50
1. Recognition
2. Measurement
3. Other Presentation Matters
4. Disclosure
5. Implementation Guidance
a. Leveraged Lease Involving an Existing Asset of a Regulated Utility
b. Delayed Equity Investment
c. Income Taxes Related to Leveraged Leases
VI. Sale-Leasebacks
A. Comparison With Current U.S. GAAP
B. Accounting for a Sale and Leaseback Transaction Under ASC 842
1. Determining Whether the Transfer Is Considered a Sale
a. Application of ASC 606
b. Determining Whether Seller-Lessee Has Control Before Transfer to Buyer-Lessor
c. Effect of Residual Value Guarantee
2. Lessee Costs Related to Construction or Design
3. Lessee Indemnification for Environmental Contamination
4. Sale Subject to Pre-existing Lease
5. Transfer of Tax Benefits
6. Accounting for the Transaction if the Transfer Is a Sale and Leaseback
7. Accounting for the Transaction if the Transfer Is Not a Sale (Failed Sale and Leaseback)
8. Sale-Leaseback-Sublease Transaction
C. Disclosure
VII. Build-to-Suit Leases
A. Elimination of Detailed Requirements in Current U.S. GAAP
B. Example of Lessee Control Over Asset Under Construction
C. Transition
VIII. Planning for Implementation

Working Papers

TABLE OF WORKSHEETS
Worksheet 1 FASB Illustration of ASC 842-20-50-4 Lessee Disclosure Requirements