pwc 10min lease accounting

Impact could be felt in 2015 there has been debate whether the future payment obligations are debt the proposal requires retroactive restatement could affect banks capital sufficiency ratios (ratio of a bank's capital to its risk) lease component contain more than one asset; decision made on the basis on primary asset need to consider whether you have a lease or just a service agreement How is a lease defined? o 1. Does the contract allow the use of a physical asset? o 2. Can the asset be substituted? o 3. Are you responsible for the business decisions relating to the asset (e.g., when and how the asset is operated)? o 4. How dependent are the associated services that the asset provides? Per the proposal, a lease must involve an identified asset. When an arrangement depends on the use of an asset, it neednt be specified in the contract Control of the asset. In a lease, the party that can direct and benefit from use of the asset controls the asset o Assume a delivery company executes a contract with a vehicle manufacturer to use a fleet of trucks for a period of time. The agreement identifies the trucks and allows the delivery company to control how and when the trucks are used. This arrangement is a lease. o In contrast, assume a business hires a third-party service to deliver a parcel. It has no control over a particular truck, cant control the route, and shares the benefit of the truck with other customers. This is not a lease. Complications could include: o Substitution rights o Customizing o Decision making (level of decision making for control) o Service agreements For example, a company that outsources the IT for its back office must consider whether its service agreement includes equipment leases, like computers or printers. If so, the leases must be split out and accounted for separately.

Exposure Draft
Definition of lease: At inception of a contract, an entity shall determine whether that contract is or contains a lease by assessing both of the following: a) whether fulfilment of the contract depends on the use of an identified asset; and b) whether the contract conveys the right to control the use of the identified asset for a period of time in exchange for consideration