July 19th, 2011, By Dana Haugh
You’ve made it this far, so I’m not going to bore you with any more quips about FASB or their new regulations—it’s already boring enough. Onto business, then.
Lessees will use the incremental borrowing rates at the lease commencement to calculate the amount capitalized. Leases with interim funding will have deferred and amortized earnings on the interim rents at the beginning of the lease commencement. Interim rates will not be part of the capitalized lease amount, resulting in a lessee’s greater awareness in the cost of the lease.
All of this is to make our lives easier. So why does it feel like it gets more complex the more I read about it?
Lease incentives, such as cash payments, received from the lessor are included as a cash inflow and will therefore be considered in the cash flow discounting to determine the value of the right of use asset and capitalized lease obligation.
The handling of bundled lease payments is also receiving an updated set of rules: Payments will now be divided into two branches by lessees and lessors when all elements are known—thus, utilizing observable stand alone prices. When there is only one observable element, the assumption will be that the cost of the other is residual. When there are no observable elements, the lessee must then capitalize the entire payment as a lease. By doing this, lessors are forced to disclose the breakdown of elements in a full service lease because lessees will not accept capitalizing the full-bundled payments.
Subleases will also be modified (surprise!) and in the new FASB, head leases and subleases will be separated. An intermediate lessor (a lessee in a head lease) should account for its assets and liabilities arising from the head lease in accordance with decisions-to-date for all lessees. An intermediate lessor (a lessor in a sublease) should account for its assets and liabilities arising from the sublease in accordance with the decisions-to-date for all lessors.
If more than one approach for lessor accounting is agreed upon by FASB, an intermediate lessor (lessor in a sublease) should evaluate the right of use asset and not the underlying asset.
Initial direct costs will be changed in that lessors will need to include the initial direct costs as a reduction in the amount of the right to receive lease payments at time zero. Essentially this is aimed to reduce the implicit rate, which then reduces the lease revenue recognized over the term of the lease.
Yeah, I’m not (or FASB’s not) done yet. Part Four, brave soul.
All information gathered from FASB and Leasing 101