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Journal entry — Leases — FASB continues redeliberations

Published on: May 13, 2015

At a FASB-only meeting today, the Board discussed (1) certain issues identified during the drafting of the lease accounting standard and (2) the next steps of the leases project.

Lessor Model — Incorporating a Collectibility Threshold

The Board tentatively decided that all leases in which collectibility of payments is not probable and that do not result in the transfer of control of the underlying asset should be classified and accounted for as Type B leases (i.e., operating leases). In contrast, all leases in which control of the underlying asset is transferred to the lessee should be assessed and accounted for in accordance with the collectibility guidance applicable to all sales of nonfinancial assets as detailed in ASC 6061 and ASC 610.2

Editor’s Note: In a manner consistent with the revenue recognition guidance that was being developed at the time, the FASB’s May 2013 exposure draft on leases did not propose requiring a lessor to consider collectibility upon the recognition of a lease receivable. Subsequently, however, the FASB included a collectibility threshold in its final revenue recognition guidance (ASC 606) issued in 2014. Therefore, to remain consistent with how an entity considers collectibility under ASC 606, the FASB tentatively decided to include such a threshold in its final lease accounting standard.

Lessor Model — Type A Lease Modifications and Impairment

The FASB tentatively decided that when a Type A lease is modified in a manner that would not result in a separate lease, the lessor should account for the modified lease on a prospective basis as of the effective date of the modification by considering the modified lease terms and conditions. Under this approach, any prepaid or accrued lease rentals related to the original lease would be accounted for as part of the lease payments for the modified lease. As a result, the modified lease would essentially be accounted for as a new lease, with no recorded gain or loss.

In addition, the FASB tentatively decided that lessors would apply the impairment guidance in ASC 3103 to the entire net asset, including the unguaranteed residual asset.

Lessee’s Purchase of Leased Asset During Lease Term

In a manner consistent with existing U.S. GAAP, the Board tentatively decided that upon a lessee’s purchase of a leased asset during the lease term, the lessee would adjust the carrying amount of the purchased asset by the difference between the purchase price of the asset and the lease obligation. Accordingly, the lessee would not record a gain or loss as a result of the purchase. Under the final standard, this guidance would apply to both Type A and Type B leases.

Next Steps

The FASB staff indicated that the Board still needs to discuss (1) the costs and benefits of the proposed model and (2) the standard’s effective date. Nevertheless, the staff plans to provide the Board with a draft standard within the next three weeks. After the Board’s review, the staff expects an external review draft to be issued in July 2015 and a final standard to be issued by the end of 2015.

Editor’s Note: While the Board has not formally indicated the effective date of the new standard, we believe that this date would be no sooner than January 1, 2019 (with a one-year deferral for nonpublic business entities).

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1 FASB Accounting Standards Codification Topic 606, Revenue From Contracts With Customers.

2 FASB Accounting Standards Codification Topic 610, Other Income.

3 FASB Accounting Standards Codification Topic 310, Receivables.

Journal entry — Leases — FASB continues redeliberations Image

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