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Introduction




                        Topic              ASC 842 guidance                Observations
                                           term. Recognition of expense for a
                                           finance lease will be similar to
                                           capital leases in ASC 840.

                        Lessor accounting   The classification criteria are   Under ASC 840, to achieve sales-type
                                           similar to that for lessees, with an   lease accounting for real estate, title must
                                           additional requirement to assess   automatically transfer to the lessee by the
                                           collectibility to support       end of the lease term. This condition has
                                           classification as a direct financing   been removed from the guidance in ASC
                                           lease. Also, in order to        842.
                                           derecognize the asset and record
                                           revenue, collection of payments   In ASC 840, the difference between a
                                           due must be probable for sales-  sales-type lease and a direct finance lease
                                                                           is the presence of upfront profit. When
                                           type leases.
                                                                           present, the arrangement is a sales-type
                                           To recognize upfront revenue and   lease.
                                           profit in a sales-type lease, the   Under ASC 842, the key distinction is
                                           lessee will need to obtain control
                                           over the leased asset.          based on control. As a practical matter,
                                                                           this will likely depend on whether the
                                                                           lease payments criterion has been met in
                                                                           part due to a third-party residual value
                                                                           guarantee. When this is the case,
                                                                           presuming payments are collectible, the
                                                                           lease is classified as a direct financing
                                                                           lease.
                                                                           Lessors do not recognize variable
                                                                           consideration until the variability is
                                                                           resolved. As a result, under ASC 842, a
                                                                           sales-type lease with significant variable
                                                                           payments may result in a “Day 1” loss for
                                                                           a lessor. Under ASC 840, such leases
                                                                           would have instead been classified as
                                                                           operating leases.

                        Lease versus       A contract may contain lease and   Under ASC 840, property taxes and
                        nonlease           nonlease components. Under ASC  insurance are considered executory costs.
                        components         842, components include only    Under ASC 842, property taxes and
                                           those items or activities that   insurance are not considered as
                                           transfer a good or service to the   components of a contract as they are not
                                           lessee. The right to use land is   for a service provided by the lessor to the
                                           considered a separate lease     lessee and are therefore a part of contract
                                           component unless the accounting   payments.
                                           effect of accounting for it     Under ASC 840, land is separately
                                           separately would be immaterial.
                                                                           classified when the fair value of the land
                                           A lessee may choose not to      is 25% or more of the combined fair value
                                           separate nonlease components    of the land and building.
                                           from their related lease
                                           components. If this election is
                                           made, all cash flows associated
                                           with the nonlease component
                                           would be allocated to the related
                                           lease component. A lessor may
                                           elect to combine lease and





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