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918 SECTION 3 Financial Instruments and Liabilities For lessors (the owners of the asset), there are fewer differences between current GAAP and the proposed approach. A lessor will apply an approach to all Type A leases that’s substantially equivalent to existing capital lease accounting (direct financing and sales-type), and will apply to all Type B leases an approach that’s substantially equivalent to existing operating leases. One change is that a lessor cannot recognize sales profit (or revenue) at the beginning of any lease (as we do currently for a sales-type lease) that doesn’t transfer “control” 36 of the underlying asset to the lessee. This restriction is consistent with the concept of what constitutes a sale in the new revenue recognition standard, as we saw described in Chapter 5. Illustration 15–23 summarizes the new lease guidance. Lessor accounting under the new guidance is substantially the same as under current GAAP. Risks and rewards of ownership transfer Amortization exp. (on asset) Interest exp. (on liability) TYPE A Risks and rewards of ownership don’t transfer Right-of-use asset xxx Lease liability xxx Straight-line Right-of-use asset xxx Lease liability xxx TYPE lease expense B Even when risks and rewards of ownership don’t transfer to the lessee, the lessee obtains an asset—the right to use the property being leased. “The proposal is responsive to 36 As explained in more detail in Chapter 5, “control” means that the customer has direct influence over the use of the good or service and obtains its benefits. That’s a bit more restrictive than transferring the risks and rewards of ownership. Illustration 15–23 Lessee and Lessor Accounting Under the Proposed Lease Accounting Standards Update LESSEE Balance Sheet Income Statement LESSOR Balance Sheet Income Statement Risks and rewards of ownership transfer Lease receivable xxx Asset xxx Profit (if any)* xxx Interest revenue (on receivable) No depr. expense TYPE A Risks and rewards of ownership don’t transfer Continue to carry asset on books (no entry) Straight-line TYPE lease revenue B *If the lease receivable exceeds the asset’s book value and “control” of the asset is transferred to the lessee Right-of-Use Model From your own experience of leasing an apartment or a car, or knowing someone who has, you know that a lease is a contractual arrangement by which a lessor provides a lessee the right to use an asset for a specified period of time. In return for this right, the lessee agrees to make periodic cash payments during the term of the lease. As we saw in the main chapter, under current GAAP many leases qualify as operating leases and therefore do not create an asset and a liability for the lessee, even though the right to use the leased asset can be a significant benefit, and the promise to make the lease payments can be a significant obligation. As a result, many financial statement users complain that current accounting for operating leases does not provide a faithful representation of leasing transactions. The new ASU proposes to eliminate the concept of operating leases and instead require a right-of-use model by which lessees record all leases as an asset and a liability in the balance sheet the widespread view of investors that leases are liabilities that belong on the balance sheet.” Leslie Seidman, former Chairman of the FASB GAAP Change


Spiceland_Inter_Accounting8e_Ch15
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