Ey Leases

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Financial reporting developments A comprehensive guide

Lease accounting
Revised October 2011

To our clients and other friends
We are pleased to provide you with this updated edition of our Financial Reporting Developments publication, Lease accounting. This edition of our publication primarily has been updated from our prior edition to reflect updates to relevant accounting standards.
The classification of a lease for accounting purposes can have a significant impact on the financial position and earnings reported by either party to a lease transaction. The accounting guidance discussed in this publication affects entities engaged in leasing activities as either a lessee or lessor and requires both lessees and lessors to classify leases based on specified criteria. There is a high degree of complexity in accounting for lease transactions. The consequences of incorrectly assessing accounting requirements can be severe if the goal was to obtain off-balance sheet financing. Accordingly, it is important to carefully assess the propriety of a specific lease transaction prior to consummation.
For many companies, a lease transaction is an infrequent and significant event. This guide is designed to provide a summary, in one location, of the lease accounting rules. Companies that are involved in lease accounting transactions on a regular basis will be familiar with many of the issues described herein.
However, those companies as well as companies that only occasionally consider lease transactions often need the advice and assistance of professional advisors to evaluate the facts and circumstances that may be encountered in a particular transaction.
Ernst & Young professionals are prepared to help you identify and understand the issues related to lease accounting. In addition, our audit and tax professionals would be pleased to discuss with you any…...

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...IASB/FASB Meeting Week commencing 14 March 2011 IASB Agenda reference FASB Agenda reference 5D Staff Paper Contact(s) FASB ED Session March 9, 2011 Michael Gonzales Danielle Zeyher David Humphreys mgonzales@fasb.org dtzeyher@fasb.org dhumphreys@ifrs.org 143 +1 203 956 3478 +1 203 956 5265 +44 20 7246 6916 Project Topic Leases Accounting for Purchase Options Objective 1. The purpose of this paper is to discuss the accounting by lessees and lessors for purchase options included in a lease contract. 2. This paper analyzes the accounting for all purchase options, including both options that the lessee has a significant economic incentive to exercise (which would usually include bargain purchase options) and options that the lessee does not have a significant economic incentive to exercise (which would usually include non-bargain purchase options). 3. This paper is structured as follows: (a) (b) (c) (d) (e) (f) Summary of staff recommendations Summary of the proposals in the leases Exposure Draft Summary of feedback (including comment letters and other outreach) Staff Analysis Staff recommendations Appendix A – preliminary draft wording relating to the accounting for purchase options This paper has been prepared by the technical staff of the IFRS Foundation and the FASB for discussion at a public meeting of the FASB or the IASB. The views expressed in this paper are those of the staff preparing the paper. They do not purport to represent the......

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Ey History

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...finance lease can be recognized. The accounting method for a finance lease and for an operating lease is different. In the leases-joint project of IASB and FASB, opinions about accounting method of lessee divided under two accounting systems. FASB uses a dual approach and IFRS uses a single approach for lessee accounting. Under the single approach, a lessee will recognize all leases as “Type A” leases, which means recognize amortization of the right-of-use (ROU) asset separately from interest on the lease liability. Under IFRS, there are exemption of small-ticket leases and short-term leases for the accounting of lessee. For small-ticket leases, there is no clear benchmark about the classification of “small”. But short-term leases are leases that have leasing term of 12 months or less. Financial reports need to disclose more information weighing the cost. Considering this exemption is for the convenience of companies with insignificant leases, we design the line of 1% of total asset amount. As far as we concerned, comparing to the time limit, the proportion can reflect more precisely the impact on the company. Besides, for a small corporation, making an option for a lease whether to be finance lease or operating lease will cause a huge change of revenue of this year. In other words, we propose a new criterial for defining small assets and small-ticket leases. Therefore, the new standard is aligned with IASB. Scope The standard will be applied in accounting for leases......

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...Changes to Accounting Standards for Leases Who is likely to be affected? Businesses which are lessees or lessors of assets and account for lease transactions using a leasing accounting standard which changes on or after 1 January 2011. General description of the measure Current accounting standards are International Accounting Standards (IAS) and UK Generally Accepted Accounting Practice (UK GAAP). Changes to the IAS lease accounting standard are expected during 2011, and changes to UK GAAP might follow in 2013. Legislation will be introduced in Finance Bill 2011 to ensure continuity of tax treatment for lease transactions for businesses which begin to account for the transactions under new accounting standards, expected to be introduced from 2011. The measure will require tax profits and losses to continue to be calculated as if the changes to lease accounting standards had not taken place. Policy objective The measure will ensure that existing tax rules that rely on accounting classifications of leases as operating or finance leases, and the accounting treatment of lease transactions, continue to operate in the way they currently do. The objectives are to: • • ensure that lessors and lessees will be neither disadvantaged nor advantaged by the proposed accounting changes; remove uncertainty for businesses about the future tax treatment of leasing contracts, arising from uncertainty about future lease accounting standards and their interaction with current tax......

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