The SEC and Financial Reporting Institute Conference

Transcription

SEC and Financial Reporting Institute
35th Annual
SEC and Financial Reporting
Institute Conference
June 9, 2016
Millennium Biltmore Hotel
Los Angeles, California
SEC and Financial Reporting Institute Conference
June 9, 2016 | Millennium Biltmore Hotel Los Angeles
DOCUMENT INDEX
Program and Speakers
1.
Program
2.
Speakers and Speaker Biographies
Presentation Slides
3.
Revenue Recognition
4.
Leases and Financial Instruments
Materials
Emerging Issues in Financial Disclosure
5.
SEC Compliance & Disclosure Interpretations: Non-GAAP Financial Measures (May 17, 2016)
Internal Control Over Financial Reporting
6.
CFO.com article, Reaching a Consensus on Management Review Controls, John Fogarty
(February 25, 2016)
7.
Grant Thornton, New Developments Summary: FASB issues new least accounting standard;
Long-awaited guidance brings most leases on balance sheet for lessees (March 1, 2016)
8.
PricewaterhouseCoopers, In Depth: The leasing standard (March 2, 2016)
9.
PricewaterhouseCoopers, In Depth: The leasing standard – Retail and consumer industry supplement
(May 26, 2016)
10.
Grant Thornton, New Developments Summary: Accounting for financial instruments; ASU 2016-01
codifies improvements to recognition and measurement guidance (March 15, 216)
11.
PricewaterhouseCoopers, In Depth: New guidance on recognition and measurement to impact financial
instruments (January 29, 2016)
12.
PricewaterhouseCoopers, Leases – 2016 edition. PwC’s comprehensive guide to the new US GAAP
leases guidance. The 300-page document can be downloaded from this link:
http://www.pwc.com/us/en/cfodirect/publications/accounting-guides/pwc-lease-accounting-guide-asc842.html
20160607
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PROGRAM
Morning Sessions | Biltmore Bowl and Bowl Foyer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
7:30 - 8:30
Registration and Continental Breakfast
8:30 - 8:40
Welcome and Introductions
Lori L. Smith
William W. Holder
Director, SEC and Financial Reporting Institute
Assistant Professor, USC Leventhal
School of Accounting
Dean, Leventhal School of Accounting
Alan Casden Dean’s Chair in Accounting
USC Leventhal School of Accounting
8:40 - 9:30
Opening Addresses by the SEC and the FASB
Wesley R. Bricker
Dr. Thomas J. Linsmeier
Deputy Chief Accountant
Office of the Chief Accountant
U.S. Securities and Exchange Commission
Board Member
Financial Accounting Standards Board
9:30 - 10:20
Emerging Issues in Financial Disclosure
Moderator
Lori L. Smith
Panelists
Brian T. Croteau
Mark Kronforst
Director, SEC and Financial
Reporting Institute
Assistant Professor, USC Leventhal
School of Accounting
Chief Accountant
Division of Corporation Finance
10:20 - 10:35
Refreshment Break
10:35 - 12:30
Internal Control Over Financial Reporting - The Focus Continues
Perspectives from the SEC, PCAOB, Auditors and Issuers
Moderator
John W. White
Panelists
Brian T. Croteau
Partner
Cravath, Swaine & Moore LLP
Director
Division of Registration and Inspections
Public Company Accounting Oversight
Board
John A. Fogarty
Laura J. Phillips
Partner, Audit Consultation
Deloitte & Touche LLP
Vice President, Corporate Controller
Brown-Forman Corporation
Michael J. Gallagher
Managing Partner, Assurance Quality
PricewaterhouseCoopers LLP
20160603
Helen A. Munter
PROGRAM
Luncheon and Keynote Presentation | Crystal Ballroom . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
12:40 - 2:10
Luncheon and Keynote Presentation
Introduction
Roger H. Molvar
Keynote Presentation
Jay D. Hanson
Board Member
PacWest Bancorp
Board Member
Public Company Accounting Oversight Board
Afternoon Sessions | Biltmore Bowl and Bowl Foyer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2:20 - 4:00
Revenue Recognition
Moderator
Dennis R. Beresford
Panelists
Wesley R. Bricker
Alison T. Spivey
Executive in Residence
J.M. Tull School of Accounting
University of Georgia
Partner, Assurance Services National Accounting
Ernst & Young LLP
Joshua D. Paul
Scott A. Taub
Director, Technical Accounting
Google
Managing Director
Financial Reporting Advisors, LLC
4:00 - 4:15
Refreshment Break
4:15 - 5:30
Moderator
Rahul Gupta
Panelists
Scott A. Taub
Partner, National Professional
Standards Group
Grant Thornton LLP
Board Member
Managing Director
Elizabeth A. Paul
Partner, National Professional
Services Group
Reception | Biltmore Bowl Foyer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
5:30 - 6:30
20160603
Reception
SPEAKERS
Dennis R. Beresford
Wesley R. Bricker
Brian T. Croteau
John A. Fogarty
J.M. Tull School of
Accounting
Office of the Chief
Accountant
U.S. Securities and
Exchange Commission
Office of the Chief
Accountant
U.S. Securities and
Exchange Commission
Partner, Audit
Consultation
Managing Partner,
Assurance Quality
PricewaterhouseCoopers
LLP
Rahul Gupta
Jay D. Hanson
William W. Holder
Mark Kronforst
Thomas J. Linsmeier
Partner, National
Professional Standards
Group
Grant Thornton LLP
Board Member
Public Company
Accounting Oversight
Board
Dean, Leventhal School of
Accounting
Alan Casden Dean’s Chair
in Accounting
USC Leventhal School of
Accounting
Chief Accountant
Division of Corporation
Finance
U.S. Securities and
Exchange Commission
Board Member
Financial Accounting
Standards Board
Roger H. Molvar
Helen A. Munter
Elizabeth A. Paul
Joshua D. Paul
Laura J. Phillips
Board Member
PacWest Bancorp
Director
Division of Registration
and Inspections
Public Company
Accounting Oversight
Board
Partner, National
Professional Services
Group
PricewaterhouseCoopers
LLP
Director, Technical
Accounting
Google
Vice President,
Corporate Controller
Brown-Forman
Corporation
Lori L. Smith
Alison T. Spivey
Scott A. Taub
John W. White
Director, SEC & Financial
Reporting Institute
Assistant Professor, USC
Leventhal School of
Accounting
Partner, Assurance
Services - National
Accounting
Ernst & Young LLP
Managing Director
Financial Reporting
Advisors, LLC
Partner
Cravath, Swaine
& Moore LLP
20160603
SPEAKER BIOGRAPHIES
Dennis R. Beresford
J.M. Tull School of Accounting
Dennis (Denny) R. Beresford is Executive in Residence at the J. M. Tull School of Accounting, Terry
College of Business, University of Georgia. From July 1997 through June 2013 he was Ernst & Young
Executive Professor of Accounting. From January 1987 through June 1997 he was chairman of the
Financial Accounting Standards Board. Previously, he was national director of accounting standards for
Ernst & Young. He is a graduate of the University of Southern California.
Denny previously served on the boards of National Service Industries, Inc., WorldCom (MCI), Inc.,
Kimberly-Clark Corporation, Fannie Mae, and Legg Mason, Inc. He is also a member of the board of
directors of the National Association of Corporate Directors and the Financial Reporting Committee of
the Institute of Management Accountants.
In 1995, Denny was awarded an honorary Doctor of Humane Letters degree from DePaul University. In
2004 he was elected to the Accounting Hall of Fame and received the AICPA Gold Medal for
distinguished service. In 2006 he was selected as one of the inaugural inductees of Financial Executives
International’s Hall of Fame. In 2012 the Journal of Accountancy named him as one of the “125 people
of impact in accounting,” as among those who have had the most impact on the accounting profession
since the AICPA was founded in 1887. In 2013 he received the Institute of Management Accountants’
first Distinguished Member Award.
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SPEAKER BIOGRAPHIES
Wesley R. Bricker
Wes Bricker serves as the Deputy Chief Accountant overseeing the accounting group in the Securities
and Exchange Commission’s Office of the Chief Accountant.
The accounting group advises the Commission on accounting and auditing matters and works closely
with private sector accounting bodies such as the Financial Accounting Standards Board. Public
companies, auditors, and other offices and divisions within the SEC regularly consult with the Office of
the Chief Accountant on the application of accounting standards and financial disclosure requirements.
He joined the SEC from PricewaterhouseCoopers LLP, where he was a partner responsible for clients in
the banking, capital markets, financial technology, and investment management sectors.
Earlier, he served as a professional accounting fellow in Office of the Chief Accountant and prior to that
held various audit and professional practice positions at PwC, including in the firm’s national office
during the global financial crisis advising on complex financial accounting matters.
Mr. Bricker is trained as an accountant and lawyer with degrees from Elizabethtown College and the
American University Washington College of Law. He is licensed to practice as a certified public
accountant in Virginia, Maryland, the District of Columbia, Pennsylvania, and New Jersey and as an
attorney in New York.
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SPEAKER BIOGRAPHIES
Brian T. Croteau
Brian Croteau is the Deputy Chief Accountant of the Professional Practice Group within the Office of the
Chief Accountant (OCA) at the U.S. Securities and Exchange Commission in Washington, DC. In this
position, he plays a key role in the Commission’s work related to overseeing the activities of the Public
Company Accounting Oversight Board (PCAOB), managing the resolution of auditor independence issues
and ethical matters, and monitoring audit and independence standard setting internationally. He also
provides advice and develops positions on issues related to performance of audits, including auditor
independence, that are referred to the OCA due to their complexity or policy implications. Brian has also
served as Senior Associate Chief Accountant in the Professional Practice Group of OCA during his
previous tenure at the SEC from 2004-2007.
Prior to returning to the SEC in June 2010, Brian was a Partner in the National Office of
PricewaterhouseCoopers LLP (PwC) from 2007-2010. In this role, his primary focus was on audit quality.
Brian performed consultations with engagement teams on complex and judgmental auditing matters,
and supported firm quality initiatives, including development and implementation of Firm audit policy
and guidance. He also participated in various Firm audit training and webcast initiatives, and had active
roles in the Firm’s input to PCAOB, AICPA, and IAASB audit standard- setting activities. Additionally, he
was active on numerous task forces of the AICPA and the Center for Audit Quality. Brian worked as a
senior manager in the Hartford, Connecticut office of PwC prior to joining the SEC staff in 2004. During
his previous ten years of employment with PwC from 1994-2004, he managed the audits of both public
and private companies.
Brian is a Certified Public Accountant and he is a member of the AICPA. Brian earned his B.B.A. in
accounting from the University of Massachusetts at Amherst. He was named 2007 accounting alumnus
of the year of the UMass-Amherst Eisenberg School of Management.
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SPEAKER BIOGRAPHIES
John A. Fogarty
Partner, Audit Consultation
John Fogarty is a partner in Deloitte’s Professional Practice Network. He currently leads the Audit
Consultation Group, is an engagement quality control reviewer for the audit of a major company, and
interacts with regulators related to audit standard setting. John has been with Deloitte for 38 years
starting in Houston in direct client service and in a variety of roles in the National Office including
auditing standards, audit methodology and technology, director of auditing policy and methodology,
director of industry professional practice, and chair of the global audit policy group.
John served as Deputy Chair of the International Audit and Assurance Standards Board (IAASB) in 2009
after serving as a member of IAASB from 2004 to 2008. He served as the Chair of US Auditing Standards
Board (ASB) in 2004-2006, and as a member in 1995-1998 and from 2002 to 2004. He led adoption of
risk assessment standards and the strategic direction to converge with ISAs.
John earned his BA and MACCO from Rice University.
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SPEAKER BIOGRAPHIES
Managing Partner, Assurance Quality
As PwC’s Managing Partner, Assurance Quality, Mike leads PwC’s U.S. Assurance National Office
(National Office). National Office functions include: Accounting Services; SEC Services; Risk
Management; Strategic Thought Leadership; and Auditing Services Methods and Tools. He is also
responsible for PwC’s Learning & Development, Regulatory Risk and Quality Control; Quality Strategy
and Inspections groups.
Mike has more than 28 years of public accounting experience. His previous National Office roles and
leadership positions include serving as: PwC’s U.S. Chief Accountant; U.S. Risk Management Leader; and
National Office Accounting Consulting Partner. Prior to joining the National Office, Mike served as a
Global Engagement Partner on a number of multinational SEC registrants focused primarily in the
chemical/industrial products sector.
Mike served on PwC’s US Board of Partners and Principals, including the Finance, Governance, and
Clients and Strategy committees.
He is a member of the Public Company Accounting Oversight Board’s (PCAOB) Standing Advisory Group
(SAG) and Chairman of the Center for Audit Quality’s (CAQ) Professional Practice Executive Committee
(PPEC). Mike is also a frequent speaker at profession related events and a member of the AICPA and
Pennsylvania Institute of CPAs.
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SPEAKER BIOGRAPHIES
Rahul Gupta
Partner, National Professional Standards Group
Grant Thornton LLP
Rahul is a Partner in the National Professional Standards Group (NPSG) of Grant Thornton LLP. Rahul
assists engagement teams and clients with technical accounting issues and monitors current accounting
developments, under both U.S. GAAP and IFRS. Rahul is also involved in developing firm’s thought
leadership on accounting issues, including liaising with Financial Accounting Standards Board (FASB),
International Accounting Standards Board (IASB), AICPA and Securities and Exchange Commission.
Rahul has more than sixteen years of public accounting experience in the United States and India. Rahul
was a staff member at FASB from August 2011 through January 2016, where he provided technical
depth and practical insight to assist the FASB in improving U.S. GAAP. Prior to joining the FASB, he was a
senior manager in the firm’s NPSG, where he assisted engagement teams and firm’s clients with
technical accounting issues. Prior to joining the NPSG, Rahul worked in the firm’s Dallas audit practice. In
India, Rahul started his career working in the audit practice of Grant Thornton International’s Indian
member firm in New Delhi focusing on clients that reported under U.S. GAAP.
Rahul is a Certified Public Accountant in Texas and Illinois, and a Chartered Accountant (Associate
Member) in India. Rahul holds a Bachelor of Commerce degree from Agra University, India, and a Post
Graduate Diploma in Information System Audit from the Institute of Chartered Accountants of India.
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SPEAKER BIOGRAPHIES
Jay D. Hanson
Board Member
Jay Hanson was appointed to be a Board Member of the Public Company Accounting Oversight Board by
the Securities and Exchange Commission in January 2011, and reappointed for a second term, ending in
October 2018.
Prior to joining the Board, Mr. Hanson spent nearly 32 years at McGladrey & Pullen, LLP. At the time of
his appointment to the PCAOB, Mr. Hanson was the National Director of Accounting, overseeing the
firm's accounting guidance and training practices, as well as leader of the firm's Accounting Standards
Group.
Mr. Hanson served as a member of the Emerging Issues Task Force of the Financial Accounting
Standards Board (FASB) from 2006 to 2011. He also was a member of the Financial Reporting Executive
Committee of the American Institute of Certified Public Accountants (AICPA) from 2005 to 2011, serving
as Chairman from 2008-2011.
Mr. Hanson is a certified public accountant licensed to practice in his home state of Minnesota. He
graduated from Concordia College in Moorhead, Minnesota, with a B.A. in Business Administration,
Accounting and Mathematics.
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SPEAKER BIOGRAPHIES
William W. Holder
Dean, Leventhal School of Accounting and
Alan Casden Dean’s Chair in Accounting
William Holder serves as Dean of the USC Leventhal School of Accounting, and holds the Alan Casden
Dean’s Chair of Accountancy. Prior to his current post, Dean Holder was the Ernst & Young Professor of
Accounting and Director of the SEC and Financial Reporting Institute in the Marshall School of Business
at the University of Southern California.
Dean Holder is an expert on financial reporting and auditing. He has published extensively on these
subjects and received numerous awards during his career, including being twice named as one of the
“Top 100 People” in the accounting profession and receiving the AICPA Gold Medal for Distinguished
Service, the highest honor awarded by that organization. He has served on a number of governance and
standard setting authorities including the Accounting Standards Executive Committee of the AICPA and
the Governmental Accounting Standards Board. During Congressional hearings leading to passage of the
Sarbanes/Oxley Act, he provided invited testimony about financial reporting, auditing and corporate
governance.
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SPEAKER BIOGRAPHIES
Mark Kronforst
Chief Accountant
Division of Corporation Finance
Mark Kronforst is the Chief Accountant in the Division of Corporation Finance at the U.S. Securities and
Exchange Commission. Mark’s previous roles in the Division include Associate Director – Disclosure
Operations and Deputy Chief Accountant. Before joining the Division in 2004, Mark worked for a large
SEC registrant as the Director of Financial Reporting and as an audit senior manager in KPMG’s Silicon
Valley and Minneapolis offices.
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SPEAKER BIOGRAPHIES
Thomas J. Linsmeier
Board Member
Thomas J. Linsmeier was appointed as a member of the Financial Accounting Standards Board (FASB) in
July 2006 and reappointed to a second five-year term starting in July 2011. An award-winning teacher
and researcher with particular expertise in financial reporting for financial instruments, derivatives and
risk management activities, Dr. Linsmeier was formerly Russell E. Palmer Endowed Professor and
Chairperson of the Department of Accounting and Information Systems at Michigan State University.
He also has served as Academic Fellow and Special Consultant to the Office of the Chief Accountant at
the U.S. Securities and Exchange Commission (SEC) and has held professorial appointments at the
University of Iowa and the University of Illinois at Urbana-Champaign.
Dr. Linsmeier’s research has explored the role of accounting information in securities markets, including
the usefulness to investors of fair value and market risk management disclosures, the valuationrelevance of earnings component information, and the economic effects of changes in accounting
regulation. His work has been published in The Accounting Review; Journal of Accounting Research;
Review of Accounting Studies; Accounting Horizons; Management Science; Journal of Accounting,
Auditing, and Finance; Journal of Business, Finance and Accounting; Accounting and Business Research;
and Financial Analysts Journal.
Dr. Linsmeier has served as chairman of the Financial Accounting Standards Committee and president of
the Financial Accounting and Reporting section of the American Accounting Association. He received his
Ph.D. and MBA from the University of Wisconsin-Madison and his BBA from the University of WisconsinMilwaukee.
Dr. Linsmeier’s second FASB term on ends on June 30, 2016.
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SPEAKER BIOGRAPHIES
Roger Molvar
Board Member
PacWest Bancorp
Roger H. Molvar serves as a director and member of the audit and the compensation, nominating, and
governance committees of PacWest Bancorp, the largest independent bank headquartered in Los
Angeles. In 2014, CapitalSource Bank merged with PacWest Bank in what was described as one of the
top value creating banking transactions of the year. At CapitalSource Bank, Roger was a founding
director and chair of both the audit and the risk management committees. Prior board service includes
Farmers & Merchants Bank, La Opinión Media, and numerous civic and non-profit entities.
From 2000 to 2004, Roger was chief executive officer of IndyMac Consumer Bank and previously, was an
executive officer and management committee member of The Times Mirror Company, which was
acquired by media giant Tribune Co. in 2000.
Roger is chairman of the SEC and Financial Reporting Institute at the University of Southern California.
He is an active participant in the West Audit Committee Network, which facilitates discussions on
enhancing corporate governance, and serves on the Editorial Advisory Board of the AICPA’s Journal of
Accountancy. He received his undergraduate degree in business administration from the University of
Washington and is a graduate of the Graduate School of Financial Management at Dartmouth and the
Stanford University Advanced Management College.
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SPEAKER BIOGRAPHIES
Helen A. Munter
Director
Division of Registration and Inspections
Helen Munter is the director of the Division of Registration and Inspections, which is the PCAOB’s largest
operating division.
Ms. Munter oversees all division operations including firm registration, the Global Network Firm
Inspection Program, the Non-Affiliate Firm Inspection Program, and the Broker-Dealer Interim
Inspection Program. Prior to being named director in 2011, Helen was a deputy director and team leader
for several of the PCAOB’s largest and most complex inspections.
During her tenure as deputy director, Helen led the team of accountants that established many of the
inspections processes that are in place today. In addition, she was responsible for opening the PCAOB’s
San Mateo office where she served as regional leader until she assumed the role of division director.
Before joining the PCAOB in 2004, Helen was an audit partner and deputy director of professional
practice in the San Francisco office of Deloitte & Touche LLP. She spent 16 years at Deloitte in the San
Francisco and Barcelona, Spain offices.
Helen received a B.A. from the University of California at Berkeley. She is a certified public accountant
and is fluent in Spanish.
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SPEAKER BIOGRAPHIES
Elizabeth A. Paul
Partner, National Professional Services Group
Beth is the Strategic Thought Leader in PwC’s Accounting Consulting Group in the National Professional
Services Group. In this role, she works closely with firm leadership to determine PwC’s position on
emerging trends in auditing, accounting, and financial reporting matters.
Prior to her current role, Beth was a client service leader in SEC Services. She was responsible for
advising clients and engagement teams regarding technical accounting and reporting matters related to
SEC registered and exempt offerings in the US.
Beth has over 23 years of experience at the firm and holds a Bachelor of Business Administration from
Pace University. She is a CPA, and is a member of the AICPA and New Jersey Society of Certified Public
Accountants.
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SPEAKER BIOGRAPHIES
Joshua D. Paul
Director, Technical Accounting
Google
Josh is the Director of Technical Accounting at Google, leading Google’s technical accounting & policy,
SEC reporting and treasury accounting.
Josh was previously a partner at PricewaterhouseCoopers. He has diverse experience serving a variety of
companies including Fortune 500 public companies. He has experience ranging from large, complex
multinationals to small and mid-cap companies.
Josh also was in PwC’s National Office and handled hundreds of client consultations. He focused on
revenue recognition, stock-based compensation, and business combinations. While in PwC’s National
Office, Josh spoke regularly at Firm, client and industry events around the country.
Josh was also Professional Accounting Fellow in the Office of the Chief Accountant of the U.S. Securities
and Exchange Commission. In this role, he worked with registrants on complex accounting and reporting
matters, monitored the activities of various professional accounting standard setting bodies within the
United States and internationally, and worked on various regulatory matters facing U.S. capital markets.
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SPEAKER BIOGRAPHIES
Laura J. Phillips
Vice President, Corporate Controller
Brown-Forman Corporation
Laura J. Phillips is Vice President, Corporate Controller at Brown-Forman Corporation where she has
responsibility for accounting, reporting, and analysis activities, including filings with the Securities and
Exchange Commission, as well as participates in planning and significant business development
activities. She serves on the Committee on Corporate Reporting of Financial Executives International.
Prior to joining Brown-Forman in 2014, Laura served for six years as Assistant Corporate Controller of
General Motors Company where she played a significant role in GM’s application of fresh-start reporting
upon emergence from bankruptcy and its registration of shares for public offering.
Laura was Deputy Chief Auditor for the Public Company Accounting Oversight Board (PCAOB) before
joining GM. She was instrumental in developing the PCAOB’s standards that implement the internal
control audit requirement established by the Sarbanes-Oxley Act of 2002.
Laura began her career in 1991 as an auditor with Ernst & Young LLP in Cleveland. From 1997 to 2001,
she was a member of the firm’s National Professional Practice Group in both New York and Cleveland.
During that time, she served as a Technical Audit Advisor to the Auditing Standards Board of the AICPA
as well as a member of the AICPA Auditing Financial Instruments Task Force.
Laura is a graduate of the Executive MBA program at the University of Michigan and completed her
undergraduate work at Miami University, majoring in accounting and finance. She is a certified public
accountant in Ohio.
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SPEAKER BIOGRAPHIES
Lori L. Smith
Director
Assistant Professor of Clinical Accounting
Lori Smith is an expert in auditing and financial accounting and reporting with extensive experience from
two perspectives - as an audit and assurance partner with a global professional services firm and as a
company executive for a fortune 500 public company.
Lori is Assistant Professor of Clinical Accounting at the USC Leventhal School of Accounting, focusing on
public company financial reporting and ethics. She also serves as Assistant Dean for Academic
Administration for USC Leventhal and as Director for the SEC and Financial Reporting Institute.
Prior to joining USC, Lori was an audit and assurance partner with Deloitte and Touche LLP and Director
of Accounting for Bergen Brunswig Corporation.
Lori received a Bachelor of Science degree in Accounting from University of Southern California and is a
certified public accountant licensed in California.
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SPEAKER BIOGRAPHIES
Alison T. Spivey
Partner, Assurance Services - National Accounting
Ernst & Young LLP
Alison Spivey is a partner in Ernst & Young LLP’s Professional Practice Group. She is responsible for
leading a team responsible for consulting with engagement teams on technical accounting and reporting
matters, monitoring activities of standard-setting bodies, drafting firm materials related to new and
existing accounting pronouncements and leading professional education courses, primarily in revenue
recognition, compensation arrangements, and earnings per share. Currently, she is a member of the
IASB / FASB Joint Transition Resource Group for Revenue Recognition.
Prior to joining EY, Alison spent over four years in the Office of the Chief Accountant of the U.S.
Securities and Exchange Commission. As an Associate Chief Accountant, her responsibilities included
working with public registrants on accounting and reporting matters, acting as a liaison with professional
accounting standard-setting bodies, and participating in the development of the Commission staff’s
guidance and rule proposals under Federal Securities laws. Alison consulted with registrants on technical
accounting matters and was a co-author of Staff Accounting Bulletin No. 107, Share-Based Payment.
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SPEAKER BIOGRAPHIES
Scott A. Taub
Managing Director
Scott A. Taub is a Managing Director of Financial Reporting Advisors, LLC (FRA). Based in Chicago, Illinois,
FRA provides consulting services related to accounting and SEC reporting. FRA specializes in applying
generally accepted accounting principles to complex business transactions, offering clients an unbiased
assessment of the accounting literature as applied to their situation. FRA also provides litigation support
and expert services, and FRA’s partners participate in activities to improve financial reporting and the
capital markets.
Mr. Taub is the author of the Revenue Recognition Guide, a 600-page comprehensive guide published by
CCH, and a co-author of CCH’s Financial Instruments: A Comprehensive Guide to Accounting and
Reporting. He is a member of the FASB/IASB Joint Transition Resource Group for Revenue Recognition.
Mr. Taub was a member of the IFRS Interpretations Committee from 2008-2014, and was an original
member of the Financial Accounting Standards Board (FASB) Valuation Resource Group. Mr. Taub writes
a periodic column for Compliance Week on financial reporting developments.
From September 2002 through January 2007, Mr. Taub was a Deputy Chief Accountant at the Securities
and Exchange Commission (SEC). He twice served as Acting Chief Accountant for a total of 14 months.
He played a key role in the SEC’s implementation of the accounting reforms under the landmark
Sarbanes-Oxley Act, and was responsible for the day-to-day operations of the Office of the Chief
Accountant, including resolution of accounting and auditing practice issues, rulemaking, oversight of
private sector standard-setting efforts, and regulation of auditors.
Mr. Taub represented the SEC in many venues, including advisory committees of the FASB and
International Accounting Standards Board (IASB), and in front of the House Financial Services
Subcommittee on Capital Markets, Insurance and Government Sponsored Enterprises. He also served as
the SEC Observer to the FASB’s Emerging Issues Task Force (EITF) and as Chair of the Accounting and
Disclosure committee of the International Organization of Securities Commissions (IOSCO). Mr. Taub
also was a member of the SEC staff between 1999 and 2001 as a Professional Accounting Fellow.
(continues)
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SPEAKER BIOGRAPHIES
Scott A. Taub
(continued)
Prior to September 2002, Mr. Taub was a partner in Arthur Andersen’s Professional Standards Group
(PSG). In that role, he consulted on complex financial reporting matters; helped establish and
disseminate Andersen’s policies regarding financial reporting matters; and represented the firm before
standards setters and regulators. Mr. Taub consulted and authored interpretive guidance for Andersen
on a wide variety of reporting issues, including revenue recognition, business combinations,
compensation arrangements, intangible assets, impairment and investment accounting. Prior to joining
the PSG, he was member of the audit practice in the firm’s Detroit office serving publicly held and
privately owned companies in a variety of industries.
Mr. Taub is a frequent speaker, having addressed numerous audiences sponsored by a variety of
organizations such as the Financial Executives International, the AICPA, the Institute of Management
Accountants, the Securities Regulation Institute, and the Practising Law Institute. He was the primary
author of several SEC reports and publications, including the Report and Recommendations Pursuant to
Section 401(c) of the Sarbanes-Oxley Act of 2002 On Arrangements with Off-Balance Sheet Implications,
Special Purpose Entities, and Transparency of Filings by Issuers and the Study Pursuant to Section 108(d)
of the Sarbanes-Oxley Act of 2002 on the Adoption by the United States Financial Reporting System of a
Principles-Based Accounting System.
Mr. Taub received an undergraduate degree in economics in 1990 from the University of Michigan in
Ann Arbor. He won the William A. Paton Award for his performance on the CPA exam. In 2005 Mr. Taub
won the SEC’s award for Supervisory Excellence. He is a licensed CPA in Michigan and Illinois.
20160603
19
SPEAKER BIOGRAPHIES
John W. White
Partner
Cravath, Swaine & Moore LLP
John W. White is a partner in Cravath’s Corporate Department and serves as Chair of its Corporate
Governance and Board Advisory practice. From 2006 through 2008, he served as Director of the Division
of Corporation Finance at the U.S. Securities and Exchange Commission, which oversees disclosure and
reporting by public companies in the United States.
While on the SEC staff, Mr. White led the Division through one of the most significant and prolific
rulemaking periods in its history, including the Commission’s adoption of final rules addressing executive
compensation disclosure, Sarbanes‑Oxley Section 404’s internal control requirements, internet access
to proxy materials, oil and gas disclosure, use of interactive data in financial reporting, shareholder
proposals relating to the election of directors, private offerings, and capital raising and reporting by
smaller public companies, as well as the Commission’s issuance of guidance regarding the use of
corporate websites. International initiatives included acceptance of International Financial Reporting
Standards (IFRS) by foreign private issuers, the proposed roadmap for use of IFRS by U.S. issuers and
modernizing the Commission’s rules on cross‑border tender offers and deregistration and exemption
from registration of foreign issuers, as well as revisions to the public reporting regime for foreign private
issuers. He played an integral role in the SEC’s response to market turmoil throughout 2008, ensuring
that the Division acted swiftly and appropriately to facilitate strategic transactions and access to capital
for public companies.
During his over 25 years as a partner at Cravath, Mr. White has focused his practice on representing
public companies on a wide variety of matters including corporate governance matters, public reporting
obligations, public financings and restatements and other financial crises.
Mr. White is a member of the Standing Advisory Group (SAG), which advises the Public Company
Accounting Oversight Board (PCAOB). He has also served on the Financial Accounting Standards Advisory
Council (FASAC), which advises the Financial Accounting Standard Board (FASB).
(continues)
20160603
20
SPEAKER BIOGRAPHIES
John W. White
(continued)
He is a member of the Board of Trustees and the Audit Committees of both the Practising Law Institute
and the SEC Historical Society. Mr. White is a frequent speaker on corporate governance and the
securities laws. He served three years on the New York Stock Exchange’s Legal Advisory Committee, four
years as Chairman of the Securities Regulation Institute and five years as Co‑chair of PLI’s Annual
Institute on Securities Regulation. He is currently a member of the Annual Institute’s Advisory
Committee as well as the Advisory Committee for PLI’s Annual Institute in Europe. Additionally, he
serves as an inaugural member of The American College of Governance Counsel. Mr. White was selected
by National Association of Corporate Directors (NACD) as one of the 100 “most influential people in the
boardroom and corporate governance community” in 2014 and 2015. He was named a nationwide
“Legend” by Lawdragon in 2015. Mr. White is recognized by Chambers USA: America’s Leading Lawyers
for Business in both securities regulation and capital markets and is named in The Legal 500, The Best
Lawyers in America, Lawdragon’s 500 Leading Lawyers in America and Ethisphere Institute’s “Attorneys
Who Matter.”
Mr. White received a B.S. with honors in accounting from the University of Virginia in 1970, and in May
1970 he received the Elijah Watts Sells award for the highest score in the nation on the Uniform CPA
Examination. He received a J.D. magna cum laude from New York University School of Law in 1973,
where he was Managing Editor of the Law Review. After a judicial clerkship with Hon. John J. Gibbons of
the U.S. Court of Appeals for the Third Circuit, Mr. White joined Cravath in 1975 and became a partner
in 1980. At Cravath, he has served as Recruiting Partner, Corporate Managing Partner, Finance Partner
and twice as Head of the Corporate Department.
20160603
21
June 9, 2016
June 9, 2016
MODERATOR
Denny Beresford
PANELISTS
Wesley R. Bricker
Alison T. Spivey
Ernst & Young LLP
Joshua D. Paul
Scott A. Taub
Google
20160607
Revenue Recognition | 1
June 9, 2016
Countdown to adoption
6 months
• Early adoption
• All calendar year-end
entities
20160607
18 months
• Mandatory adoption
• Calendar year-end
public entities
June 9, 2016
Summary of the model
►
Core principle: Recognize revenue to depict the transfer of
promised goods or services to customers in an amount
that reflects the consideration to which the entity expects
to be entitled in exchange for those goods or services
Step 1:
Identify the contract(s) with a customer
Step 2:
Identify the performance obligations in the contract
Step 3:
Determine the transaction price
Step 4:
Allocate the transaction price to the performance obligations
Step 5:
Recognize revenue when (or as) each performance obligation is satisfied
Step 1: Identify the contract(s)
1
►
►
Contract defined as an agreement between two or more
parties that creates enforceable rights and obligations
Arrangement must meet certain criteria, including that
collection is probable, to be within the scope of the
standard
Clarifications:
 Assess the probability of collecting substantially all of the
consideration for goods and services that will be transferred
 Consider ability to manage exposure to credit risk (but ignore ability
to repossess asset transferred)
 Recognize nonrefundable consideration received as revenue when
collectibility is not probable only in certain situations
20160607
June 9, 2016
Implementation considerations
Selected TRG items of general agreement
►
Assessing and reassessing collectibility
If transaction price is probable of collection for a portfolio of
contracts, record revenue in full and separately evaluate the
corresponding contract asset or receivable for impairment
►
Example:

Assume an entity expects to be entitled to $100 for providing services
to a customer but expects to collect 98% of amounts billed on a
portfolio basis

If the entity provides the service and invoices $100, record revenue for
$100 and bad debt expense of $2 when the receivable is impaired
Exercise judgment to determine whether changes in the facts and
circumstances are significant enough to indicate that a contract no
longer exists
►
Implementation considerations (continued)
►
Determining the duration of a contract (i.e., the contractual
period)
Substantive termination penalties indicate that the stated
contractual term is the duration
►
Example:
►
20160607

A customer has the right to cancel at the end of each year in a fouryear service contract

However, substantive termination penalty is required

Contractual period is four years
If any party can cancel without penalty, the contract is treated as
month-to-month
June 9, 2016
Step 2: Identify the performance obligations
2
►
A performance obligation is a promise (explicit or implicit)
to transfer to a customer either:
►
►
►
A distinct good or service
A series of distinct goods or services that are substantially
the same and have the same pattern of transfer
Performance obligations are identified at contract
inception and are determined based on:
►
Contractual terms and customary business practice
Clarification: Entities can disregard promises deemed to be immaterial
in the context of a contract
2
►
►
Incidental obligations or marketing incentives (e.g.,
loyalty programs) may be performance obligations
Does not include activities to satisfy an obligation (e.g.,
set-up activities) unless a good or service is transferred
to the customer
Clarifications:
 Entities can elect to account for shipping and handling performed
after control has transferred as a fulfillment cost
 Guidance was added on when to accrue fulfillment costs if a
promised good or service is immaterial or the entity has made the
shipping and handling election
20160607
June 9, 2016
Two-step process to identify which goods or services are distinct
Step 1 - Capable of being distinct
Step 2 - Distinct in the context of the contract
Evaluate whether multiple promised goods or services work together to
deliver a combined output(s)
Significant
integration
Significant modification
or customization
High interdependence
or interrelation
Other clarifications: Updated examples
►
Series of distinct goods and services
►
Evaluating whether services are “substantially the same” involves
determining the nature of the promise
Example:

Daily hotel management service including employee
management, training and accounting services

Activities may vary but each day of service is distinct
and substantially the same
►
20160607
Good or service does not need to be transferred consecutively
June 9, 2016
Implementation considerations (continued)
►
Customer options
►
►
Consider past and future transactions with the same customer
when determining whether an option represents a material right
Distinguish optional purchases from variable consideration by
determining the nature of the promise and the rights and
obligations of the parties
Example:

A 5-year exclusive master supply agreement that
obligates supplier to produce parts at customer’s
request

Each part is distinct and customer is not obligated but
highly likely to purchase parts

Each purchase order is a new performance obligation
Principal vs. agent
Principal (gross)
Controls the good or service
before transferring it to the
customer
Agent (net)
Arranges for another entity to
provide the good or service
Clarifications:
 Guidance was added on how to identify the unit of accounting and
how the control principle applies to transactions
 Indicators were reframed to focus on the principal; credit risk and
commission indicators were removed
 Existing examples were revised, and new ones were added
20160607
June 9, 2016
Step 3: Determine the transaction price
3
►
Transaction price is the amount of consideration to
which an entity expects to be entitled in exchange for
transferring promised goods or services to a customer
Clarification: Entities can elect to exclude amounts collected from
customers for all sales taxes and other similar taxes from the
transaction price
3
►
Transaction price includes the effects of the following:
►
►
►
►
Variable consideration (including application of the
constraint)
Significant financing component
Consideration paid or payable to a customer
Noncash consideration
Clarifications:
 Measurement date for noncash consideration is contract inception
 For noncash consideration, variable consideration guidance applies
only to variability resulting from reasons other than the form of the
consideration
20160607
June 9, 2016
►
Variable consideration
►
►
►
Consideration is variable if the quantity is undefined but the
contractual rate per unit is fixed
Apply the constraint at the contract level
Consideration payable to a customer
►
►
►
Assess whether payments that are not in the normal course of
business are at market prices
Apply the guidance to all payments in the distribution chain
Include variable consideration payable to a customer in the
transaction price when there is a history/intent of providing such
amounts (even if the entity hasn’t promised it yet)
Step 4: Allocate the transaction price
4
►
►
Transaction price is generally allocated to each separate
performance obligation on a relative standalone selling
price basis
►
When a standalone selling price is not observable, an
entity is required to estimate it
►
►
►
20160607
Two exceptions related to the allocation of variable
consideration and discounts, if certain criteria are met
Maximize the use of observable inputs
Apply estimation methods consistently in similar
circumstances
Standalone selling prices used to perform the initial
allocation should not be updated after contract inception
June 9, 2016
Step 5: Recognize revenue
5
►
►
►
►
Revenue is recognized upon satisfaction of a
performance obligation by transferring control of a
promised good or service to a customer
Control transfers over time if one of three criteria is met;
otherwise control transfers at a point in time
For point-in-time control transfer, certain indicators
should be considered
Revenue is recognized over time by measuring progress
toward completion of performance obligations
►
Measuring progress when multiple (non-distinct) goods or
services are combined in a single performance obligation
►
►
A single measure of progress should be used
Evaluating how control transfers for performance obligations
satisfied over time
►
When a performance obligation is satisfied over time, control
cannot be transferred at discrete points in time
Example:

Entities should not use output methods based on
milestones reached that do not correlate to entity’s
performance to date
20160607
June 9, 2016
►
“Right to invoice” practical expedient for measuring progress
toward satisfaction of a performance obligation
►
►
Can apply the expedient in contracts with changing rates if the
rates correspond directly with changes in value
Amount invoiced may not correspond directly with the value
provided to the customer if there are upfront payments or
retroactive adjustments
Example:

A 10-year IT outsourcing contract has decreasing rates
to reflect decreasing costs and level of effort

Contract requires periodic benchmarking to market rates

The rates reflect the value to the customer; apply the
practical expedient if sufficient evidence exists
Other measurement and recognition topics
Licenses of intellectual property (IP)
►
A license establishes a customer’s rights to IP of the entity
Clarifications:  IP is either functional or symbolic
Functional
►
►
►
IP has significant standalone
functionality
Utility is not affected by licensor’s
ongoing activities
Examples: completed media
content, software
Recognize revenue
at a point in time*
Symbolic
►
►
►
IP does not have significant
standalone functionality
Utility is derived from licensor’s
past or ongoing activities
Examples: brands, logos, trade
names
Recognize revenue
over time
* Unless (1) the functionality of the IP is expected to substantively change as a result of activities performed by the entity
that do not transfer a good or service and (2) the customer is contractually or practically required to use the updated IP
20160607
June 9, 2016
Licenses of intellectual property (IP)
Clarifications (continued):
 Consider the license guidance for a bundled performance
obligation that includes a license of IP
 Distinguish between contractual provisions that grant rights from
those that are attributes of the license
 Do not recognize revenue from a license of IP before a copy of the
IP has been provided and the beginning of the license/renewal
period
 Sales- or usage-based royalties:
a) Use only when the predominant item is a license of IP
b) Use either the royalty exception or the general variable
consideration constraint guidance but not both
Contract costs
►
Incremental costs to obtain a contract
►
Capitalized if they are incremental and expected to be recovered
Example:
 Sales commissions directly related to obtaining new
contracts – capitalize
 Bonuses based on other metrics (e.g., profitability, EPS) –
do not capitalize
►
Assets are amortized over the period the goods or services are
transferred and are subject to impairment review
►
Refer to the applicable liability standard to determine when
costs should be accrued.
►
20160607
When accrued, evaluate whether costs meet criteria to be
capitalized
June 9, 2016
Contract costs (continued)
►
Costs of fulfilling a contract that are not subject to other
standards are capitalized if they meet certain criteria
►
Impairment testing of capitalized contract costs
► Include future cash flows associated with contract renewals
Proposed clarifications:
 Supersede guidance on preproduction costs related to long term
supply arrangements (ASC 340-10)
 When performing impairment testing:
a) Consider expected contract renewals and extensions
b) Include consideration received and expected to be received
(but not recognized as revenue)
 Add guidance on order of asset impairment testing
Disclosure
►
►
Key principle – to help financial statement users understand the
nature, amount, timing and uncertainty of revenue and cash flows
arising from contracts with customers
Entity must present qualitative and quantitative information about:
►
►
►
Contracts with customers
Significant judgments and changes in judgments made when
applying the guidance to those contracts
Assets recognized from costs to obtain or fulfill a contract
Proposed clarifications:
 Practical expedient to avoid the requirement to disclose transaction
price allocated to remaining performance obligations in specific
situations
 Expand information disclosed when practical expedients are used
20160607
June 9, 2016
Transition
Full retrospective approach
►
Modified retrospective
approach
Entities are allowed to apply the standard
only to:
►
Completed contracts that do not begin
and end within the same annual
reporting period
►
►
For contracts modified before the beginning
of the earliest period presented, entities are
allowed to use hindsight
Entities are allowed to apply the
standard to either of the following:
All contracts at the date of initial
application
►
►
Contracts that are not completed
at that date
Same practical expedient as the full
retrospective approach
Clarifications:
 A completed contract is a contract for which all (or substantially all) of the
revenue was recognized under legacy GAAP
 Entities applying the full retrospective approach are not required to disclose
the effect of the accounting change for the period of adoption
20160607
SEC and Financial Reporting Institute Conference June 9, 2016
June 9, 2016
MODERATOR
Rahul Gupta
Grant Thornton LLP
PANELISTS
Scott Taub
Elizabeth A. Paul
20160607
Leases and Financial Instruments | 1
Scope: All leases, including subleases
Topic 842 does not apply to:
Leases of
intangible assets
(Topic 350)
Leases of assets
under
construction
(Topic 360)
Leases to
explore for or
Leases of
Leases of
use
biological assets nonregenerative inventory (Topic
resources
(Topic 905)
330)
(Topics 930 and
932)
SEC and Financial Reporting Institute Conference | June 9, 2016
20160607
4
A lease is a contract, or part of a contract, that conveys the right to control
the use of identified property, plant or equipment (an identified asset) for a
period of time in exchange for consideration
5
Balance Sheet
Finance
Right-of-use
(ROU) asset
Lease liability
Operating
Right-of-use
(ROU) asset
Lease liability
Income Statement
Amortization expense
Interest expense
Single lease expense
on a straight-line
basis
Cash Flow Statement
Cash paid for
principal and
interest
payments
Cash paid for
lease payments
Classification is similar to the classification in Topic 840
Recognition and measurement exemption for short-term leases (leases 12 months or shorter do
not need to be recognized on the balance sheet)
Other than public business entities may use risk-free rates for measurement of all lease liabilities
20160607
6
Balance Sheet
Income Statement
Cash Flow Statement
Sales-Type
& Direct
Financing
Net investment
in the lease
Interest income and
any selling profit on
the lease1
Cash received
for leases
Operating
Continue to
recognize
underlying asset
Lease income,
typically on a
straight-line basis
Cash received
for leases
Classification is similar to the classification in Topic 840
1 Selling
profit is recognized at lease commencement for sales-type leases and over the lease
term for direct financing leases (note: selling profit is rare for direct financing leases)
7
Identified
Asset
That is
explicitly or
implicitly
specified
Supplier has no
practical ability to
substitute and
would not
economically benefit
from substituting the
asset
20160607
Right to
Control
Use
Decisionmaking
authority over
the use of the
asset
Lease
The ability to
obtain
substantially all
economic benefits
from the use of
the asset
8
Rights to use two or more underlying assets may be a single lease component for purposes of
applying Topic 842.
A right to use an underlying asset is a separate lease component if both:
Lessee can benefit from use of the asset
on its own or together with other
readily available resources
The underlying asset is neither
dependent on, nor highly interrelated
with, the other underlying assets in the
contract.
This guidance establishes the “unit of account” for the leases guidance for both lessees and
lessors and is similar to the distinct guidance in Topic 606 (the new revenue recognition
standard).
9
Lessee
Always separate lease from nonlease
components unless applying the accounting
policy election*
Lessor
Always separate lease from nonlease
components
Apply revenue guidance to determine
separability of nonlease components from
each other
Allocation
Based on the relative standalone price basis
of the components
Apply revenue guidance
Reallocation of
consideration
Upon reassessment of lease term/ purchase
option or contract modification
Contract modification not accounted for as
separate contract
*Accounting Policy Election – may elect, by class of underlying asset, not to separate nonlease components from
the lease component to which they relate, accounting for entire combined component as a single lease component.
20160607
10
Noncancellable period
Periods covered by option to extend lease if lessee
is reasonably certain to exercise option
Periods covered by option to terminate lease if
lessee is reasonably certain not to exercise option
Optional periods to extend (or not to terminate)
lease in which exercise of option is controlled by
lessor
Lease Term
11
Customer enters into a contract with property owner (Supplier) to use Retail Unit A for a 5-year
period. Retail Unit A is part of a larger retail space with many retail units.
Assume same facts as before, plus:
• Noncancellable period of the lease is 5 years
• Optional renewal period (in which rent approximates fair value) is for 5 years
• Remaining economic life of Retail Unit A is 25 years
• At lease commencement, Customer is not reasonably certain to exercise the renewal option,
taking into account the following:
• Renewal period rental payments are at fair value
• Retail Unit A is not customized for Customer’s needs
• Customer has not committed to install significant leasehold improvements that are expected to have
significant economic value when the renewal option becomes exercisable
20160607
12
Assume same facts as before, plus:
• Noncancellable period of the lease is 5 years
• Optional renewal period (in which rent approximates fair value) is for 5 years
• Remaining economic life of Retail Unit A is 25 years
• At lease commencement, Customer is not reasonably certain to exercise the renewal option, taking
into account the following:
• Renewal period rental payments are at fair value
• Retail Unit A is not customized for Customer’s needs
• Customer has not committed to install significant leasehold improvements that are expected to have
significant economic value when the renewal option becomes exercisable
Lease term
is 5 years
13
At commencement date, lease payments consist of following payments relating to use
of underlying asset during lease term:
Fixed
payments1
Variable Lease
Payments
(VLPs)2
Exercise Price
of Purchase
Option3
Termination
Penalties4
Residual Value
Guarantees
(RVGs)5
Lessee-paid
SPE structuring
fees6
Including in substance fixed payments, less any lease incentives paid/payable to lessee
Only VLPs that are based on an index or rate, initially measured using index/rate at commencement date
Include if lessee is reasonably certain to exercise option
4 If lease term reflects the lessee exercising an option to terminate the lease
5 For lessee only, amounts probable of being owed by lessee under RVGs
6 Fees paid by lessee to owners of a SPE for structuring the transaction.
1
2
3
20160607
*See 842-10-30-5
14
At commencement, lessees must recognize the following for all
leases with lease terms greater than 12 months:
Lease
Liability
ROU
Asset
15
Lease liability
Present value of remaining payments, using a
discount rate calculated on the basis of
information available at the commencement date
20160607
16
•The rate implicit in the
lease, if readily
determinable; otherwise
the incremental borrowing
rate
•Include initial direct costs
of the lessor in the
determination of the rate
Initial
Determination
Other than Public
Business Entity
Considerations
Reassessment
•Lessee: Reassess only when
lease liability is remeasured
for other reasons (e.g., change
in the lease term)*
•Lessor: Not required to
reassess*
* Absent a modification
•Discount Rate Accounting Policy Election: May use risk-free rates
for measurement of all lease liabilities
17
Lease liability
Initial direct costs
Prepaid lease payments
Lease incentives received
ROU Asset
20160607
18
Initial Direct Costs (IDC)
IDC = only incremental costs that an entity would not have incurred if the lease had not been
obtained (executed)
Sales-Type
Selling profit or loss:
Expense IDC at lease
commencement
No selling profit or loss:
Include IDC in initial
measurement of net
investment in the lease
Lessor
Direct Financing
Operating
Include IDC in
initial
measurement of
net investment in
the lease
Recognize as an
expense over the
lease term on the
same basis as
lease income
Finance & Operating
Lessee
Include in the initial measurement of the ROU asset and amortize the
costs over the lease term
19

Substantially unchanged from Topic 840 (Key areas updated to align with
Topic 606 Revenue)

At commencement:
Sales-Type
•Derecognize
underlying asset
•Net investment in
the lease
•Selling profit or loss
•Initial direct costs as
an expense (when
appropriate)
Direct Financing
•Derecognize
underlying asset
•Net investment in
the lease
•Selling loss arising
from lease
20160607
Operating
•Defer initial direct
costs
20
Variable Lease Payments
Lessee
Lessor
Reassess VLPs based on an index or a rate only
when the lessee remeasures the lease liability for
other reasons (e.g., change in lease term)*
Not required to reassess*
Lease Term and Purchase Options
Lessee
Reassess only upon the occurrence of a
significant event/change in circumstances that is
within the control of the lessee*
Lessor
Not required to reassess*
* Absent a modification
21
Lessee
reasonably
certain to
exercise
purchase option
Ownership
transfers at end
of lease
Lease term =
majority of
remaining
economic life
Finance/
Sale-type
Lease
20160607
PV Lease
Payments +
Lessee RVG =
substantially all
FV
Specialized asset
with no
alternative use to
lessor
22

When none of those criteria are met:
Lessee
Classify as an operating lease
Lessor
Classify as an operating lease unless…
Both direct financing lease criteria are met, classify
as direct financing lease
Direct financing lease if both:
PV of lease payments and RVG not reflected in
lease payments is greater than substantially all
the fair value of the underlying asset
Collection of lease payments and amounts
necessary to satisfy RVG is probable
23
Assumptions used:
• Ownership does not transfer at end of lease
• There is not purchase option
• Lease term is 5 years, remaining economic life
is 25 years
• Using assumed discount rate of 7%,
and assumed fair value of Retail Unit
A of $2.7 M, present value of lease
payments is not substantially all FV
• Retail Unit A is not a specialized
asset and will have alternative
use to lessor
20160607
Operating
Lease
Lessee reasonably
certain to exercise
purchase option
Ownership
transfers at end of
lease
Lease term =
majority of
remaining
economic life
Finance/
Sale-type
Lease
PV Lease
Payments +
Lessee RVG =
substantially all
FV
Specialized asset
with no
alternative use to
lessor
24
Enable users to assess amount, timing, and uncertainty of cash flows arising from leases
Qualitative
disclosures
•
•
•
•
•
Quantitative
disclosures
•
•
•
•
•
General description of lease
Basis and terms and conditions of variable lease payments, extension and termination options,
and residual value guarantees
Restrictions or covenants imposed by leases
Significant assumptions and judgments made in identifying a lease, allocation of lease
consideration, lease term, and discount rate
Significant rights and obligations for leases not yet commenced
Finance lease cost (separating amortization and interest cost)
Operating lease cost
Short-term lease cost
Variable lease cost
Separately for finance and operating leases: cash paid, weighted-average remaining lease term,
weighted-average discount rate, supplemental noncash information about lease liabilities
recognized from obtaining ROU assets, maturity analysis of undiscounted lease cash flows and a
reconciliation of undiscounted cash flows to lease liabilities
2016
Early adoption
2019
Public Business
Entities* (Annual and
Interim)
25
2020
All other entities
(Annual Periods only)
2021
All other entities
(Interim Periods)
*Includes not-for-profit entity that has issued, or is a conduit bond obligor for, securities that are traded, listed, or quoted on an exchange
or an-over-the-counter market, and an employee benefit plan that files or furnishes statements with or to the SEC
20160607
26
Issued January 2016

Equity investments measured at fair value through net income,
except:
Equity investments without readily determinable fair value elected to be marked to only
observable price changes
 Equity method investments
 Equity investments that result in consolidation of the investee
 Equity investment in federal home loan bank and federal reserve bank stock
 Ownership interest in an exchange
Affects public and
private companies
Simplified impairment test for equity investments
that hold financial
Retains current guidance for all other financial
assets assets
or owe and
financial
liabilities
liabilities



20160607
28
disclosures (continued)
Financial
liabilities without
Equity investments
measured
at FV in
readily determinable
FVs
accordance with
FVO (Topic 825)
Equity investments
without readily
determinable FVs
•
•
Present the changes in FV due to instrument-specific credit risk through OCI
Retains disclosures in Topic 825 about instrument-specific credit risk
•
Disclose:
• The carrying value of investments without readily determinable fair values
measured using the measurement alternative
• The total amount of adjustments resulting from impairment
• Total amount of adjustments for observable prices
29
Disclosure of
financial
instruments
disclosures (continued)
Financial
instruments at
amortized cost
•
Requires disclosure of financial assets and financial liabilities separately, grouped by
measurement category (e.g., FV, amortized cost, LOCOM) and class of financial asset
(e.g., loans, securities)
•
Requires public business entities to report (parenthetically in the statement of financial
position or in the notes to the financial statements) all fair values of financial
instruments measured at amortized cost based on an exit price, eliminating the ability to
use an entry price for certain fair value disclosures (e.g. loans)*
•
Non-public business entities exempt from disclosing fair value of financial instruments
measured at amortized cost in the financial statements (previously disclosed in
accordance with ASC 825-10)
•
Eliminates the requirement for public business entities to disclose the method(s) and
significant assumptions used to estimate the fair value for disclosure purposes of financial
instruments measured at amortized cost
•
Public business entities to disclose the fair value hierarchy level within which the fair
value measurement is categorized for each interim and annual period
*does not apply to demand deposit liabilities or receivables/payables due in less than one year
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30
2016
Early adoption*
2018
Public Business
Entities (Annual and
Interim)
2019
All other entities**
(Annual Periods only)
2020
All other entities**
(Interim Periods)
* Early adoption is only permitted for the following guidance in financial statements of fiscal years and interim
periods that have not yet been issued or that have not yet been made available for issuance
• Present fair value changes for financial liabilities under the fair value option resulting from changes in
instrument-specific credit risk in OCI
• Omit fair value disclosures for financial instruments reported at amortized cost (applies only to non
PBEs)
** Includes not-for-profit entities and employee benefit plans
20160607
31
Loans
Debt Securities
Held for
Investment
CECL
Held to Maturity
CECL
Available for Sale
Held for Sale
Lower of
amortized cost or
market
AFS credit loss
model*
Trading
FV-NI **
Under the new credit-loss model for AFS, credit losses will be limited to the difference between debt security’s
amortized cost basis and its fair value. “Other-than-temporary” concept will no longer exist.
**
No change to current GAAP.
33
Current US GAAP
Timing?
CECL
When “probable” that a loss “incurred”
No recognition threshold
(+ four other models)
(updated at each reporting date)
Measurement? Amount of incurred loss
Amount that reduces net carrying value to
amount expected to be collected
Past events & current conditions
Underlying Inputs? Past events & current conditions
20160607
Reasonable & supportable expectations
about future
34
‫ܣ‬െ‫ ܤ‬ൌ‫ܥ‬
Allowance for Credit Losses . . .

Valuation account

Deducted from amortized cost basis of
financial assets

Used to present “net amount expected to be
collected”

Changes flow through net income
Amortized cost . . .
unpaid principal balance
(UPB) lent to a customer
adjusted for loan fees
and origination
expenses, repayments,
writeoffs, nonaccrual
practices, and certain
hedging transactions
Amount expected to
be collected. . .
remaining amounts
expected to be
collected from each
loan
35
2018
Early adoption
2020
Public Business
Entities that are SEC
Filers (Annual and
Interim)
2021
Public Business
Entities that are not
SEC Filers
Non-Public Business
Entities* (Annual
Periods only)
2022
Non-Public Business
Entities* (Annual and
Interim)
*Includes not-for-profit entities and employee benefit plans
20160607
36
20160607
6/3/2016
SEC.gov | Compliance and Disclosure Interpretations: NonGAAP Financial Measures
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ABOUT
CORPORATION
FINANCE
DIVISIONS
ENFORCEMENT
REGULATION
EDUCATION
FILINGS
Non-GAAP Financial Measures
About
Last Update: May 17, 2016
Accounting and Financial
Reporting Guidance
These Compliance & Disclosure Interpretations ("C&DIs") comprise the Division's
interpretations of the rules and regulations on the use of nonGAAP financial measures.
The bracketed date following each C&DI is the latest date of publication or revision.
Compliance and
NEWS
Disclosure Interpretations
Filing Review Process
NoAction, Interpretive
and Exemptive Letters
Statutes, Rules and
Forms
QUESTIONS AND ANSWERS OF GENERAL APPLICABILITY
Section 100. General
Question 100.01
Question: Can certain adjustments, although not explicitly prohibited, result in a non
GAAP measure that is misleading?
Contact Us
Answer: Yes. Certain adjustments may violate Rule 100(b) of Regulation G because they
cause the presentation of the nonGAAP measure to be misleading. For example,
presenting a performance measure that excludes normal, recurring, cash operating
expenses necessary to operate a registrant’s business could be misleading. [May 17,
2016]
Question 100.02
Question: Can a nonGAAP measure be misleading if it is presented inconsistently
between periods?
Answer: Yes. For example, a nonGAAP measure that adjusts a particular charge or gain
in the current period and for which other, similar charges or gains were not also adjusted
in prior periods could violate Rule 100(b) of Regulation G unless the change between
periods is disclosed and the reasons for it explained. In addition, depending on the
significance of the change, it may be necessary to recast prior measures to conform to the
current presentation and place the disclosure in the appropriate context. [May 17, 2016]
Question 100.03
Question: Can a nonGAAP measure be misleading if the measure excludes charges, but
does not exclude any gains?
Answer: Yes. For example, a nonGAAP measure that is adjusted only for nonrecurring
charges when there were nonrecurring gains that occurred during the same period could
violate Rule 100(b) of Regulation G. [May 17, 2016]
Question 100.04
Question: A registrant presents a nonGAAP performance measure that is adjusted to
accelerate revenue recognized ratably over time in accordance with GAAP as though it
earned revenue when customers are billed. Can this measure be presented in documents
filed or furnished with the Commission or provided elsewhere, such as on company
websites?
Answer: No. NonGAAP measures that substitute individually tailored revenue
recognition and measurement methods for those of GAAP could violate Rule 100(b) of
Regulation G. Other measures that use individually tailored recognition and measurement
methods for financial statement line items other than revenue may also violate Rule
100(b) of Regulation G. [May 17, 2016]
Section 101. Business Combination Transactions
https://www.sec.gov/divisions/corpfin/guidance/nongaapinterp.htm
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Question 101.01
Question: Does the exemption from Regulation G and Item 10(e) of Regulation SK for
nonGAAP financial measures disclosed in communications relating to a business
combination transaction extend to the same nonGAAP financial measures disclosed in
registration statements, proxy statements and tender offer materials?
Answer: No. There is an exemption from Regulation G and Item 10(e) of Regulation SK
for nonGAAP financial measures disclosed in communications subject to Securities Act
Rule 425 and Exchange Act Rules 14a12 and 14d2(b)(2); it is also intended to apply to
communications subject to Exchange Act Rule 14d9(a)(2). This exemption does not
extend beyond such communications. Consequently, if the same nonGAAP financial
measure that was included in a communication filed under one of those rules is also
disclosed in a Securities Act registration statement or a proxy statement or tender offer
statement, no exemption from Regulation G and Item 10(e) of Regulation SK would be
available for that nonGAAP financial measure.
In addition, there is an exemption from Regulation G and Item 10(e) of Regulation SK for
nonGAAP financial measures disclosed pursuant to Item 1015 of Regulation MA, which
applies even if such nonGAAP financial measures are included in Securities Act
registration statements, proxy statements and tender offer statements. [Jan. 11, 2010]
Question 101.02
Question: If reconciliation of a nonGAAP financial measure is required and the most
directly comparable measure is a "pro forma" measure prepared and presented in
accordance with Article 11 of Regulation SX, may companies use that measure for
reconciliation purposes, in lieu of a GAAP financial measure?
Answer: Yes. [Jan. 11, 2010]
Section 102. Item 10(e) of Regulation SK
Question 102.01
Question: What measure was contemplated by "funds from operations" in footnote 50 to
Exchange Act Release No. 47226, Conditions for Use of NonGAAP Financial Measures,
which indicates that companies may use "funds from operations per share" in earnings
releases and materials that are filed or furnished to the Commission, subject to the
requirements of Regulation G and Item 10(e) of Regulation SK?
Answer: The reference to "funds from operations" in footnote 50, or “FFO,” refers to the
measure defined as of January 1, 2000, by the National Association of Real Estate
Investment Trusts (NAREIT). NAREIT has revised and clarified the definition since 2000.
The staff accepts NAREIT’s definition of FFO in effect as of May 17, 2016 as a performance
measure and does not object to its presentation on a per share basis. [May 17, 2016]
Question 102.02
Question: May a registrant present FFO on a basis other than as defined by NAREIT as of
May 17, 2016?
Answer: Yes, provided that any adjustments made to FFO comply with Item 10(e) of
Regulation SK and the measure does not violate Rule 100(b) of Regulation G. Any
adjustments made to FFO must comply with the requirements of Item 10(e) of
Regulation SK for a performance measure or a liquidity measure, depending on the
nature of the adjustments, some of which may trigger the prohibition on presenting this
measure on a per share basis. See Section 100 and Question 102.05. [May 17, 2016]
Question 102.03
Question: Item 10(e) of Regulation SK prohibits adjusting a nonGAAP financial
performance measure to eliminate or smooth items identified as nonrecurring, infrequent
or unusual when the nature of the charge or gain is such that it is reasonably likely to
recur within two years or there was a similar charge or gain within the prior two years. Is
this prohibition based on the description of the charge or gain, or is it based on the nature
of the charge or gain?
Answer: The prohibition is based on the description of the charge or gain that is being
adjusted. It would not be appropriate to state that a charge or gain is nonrecurring,
infrequent or unusual unless it meets the specified criteria. The fact that a registrant
cannot describe a charge or gain as nonrecurring, infrequent or unusual, however, does
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not mean that the registrant cannot adjust for that charge or gain. Registrants can make
adjustments they believe are appropriate, subject to Regulation G and the other
requirements of Item 10(e) of Regulation SK. See Question 100.01. [May 17, 2016]
Question 102.04
Question: Is the registrant required to use the nonGAAP measure in managing its
business or for other purposes in order to be able to disclose it?
Answer: No. Item 10(e)(1)(i)(D) of Regulation SK states only that, "[t]o the extent
material," there should be a statement disclosing the additional purposes, "if any," for
which the registrant's management uses the nonGAAP financial measure. There is no
prohibition against disclosing a nonGAAP financial measure that is not used by
management in managing its business. [Jan. 11, 2010]
Question 102.05
Question: While Item 10(e)(1)(ii) of Regulation SK does not prohibit the use of per
share nonGAAP financial measures, the adopting release for Item 10(e), Exchange Act
Release No. 47226, states that "per share measures that are prohibited specifically under
GAAP or Commission rules continue to be prohibited in materials filed with or furnished to
the Commission." In light of Commission guidance, specifically Accounting Series Release
No. 142, Reporting Cash Flow and Other Related Data, and Accounting Standards
Codification 230, are nonGAAP earnings per share numbers prohibited in documents filed
or furnished with the Commission?
Answer: No. Item 10(e) recognizes that certain nonGAAP per share performance
measures may be meaningful from an operating standpoint. NonGAAP per share
performance measures should be reconciled to GAAP earnings per share. On the other
hand, nonGAAP liquidity measures that measure cash generated must not be presented
on a per share basis in documents filed or furnished with the Commission, consistent with
Accounting Series Release No. 142. Whether per share data is prohibited depends on
whether the nonGAAP measure can be used as a liquidity measure, even if management
presents it solely as a performance measure. When analyzing these questions, the staff
will focus on the substance of the nonGAAP measure and not management’s
characterization of the measure. [May 17, 2016]
Question 102.06
Question: Is Item 10(e)(1)(i) of Regulation SK, which requires the prominent
presentation of, and reconciliation to, the most directly comparable GAAP financial
measure or measures, intended to change the staff's practice of requiring the prominent
presentation of amounts for the three major categories of the statement of cash flows
when a nonGAAP liquidity measure is presented?
Answer: No. The requirements in Item 10(e)(1)(i) are consistent with the staff's
practice. The three major categories of the statement of cash flows should be presented
when a nonGAAP liquidity measure is presented. [Jan. 11, 2010]
Question 102.07
Question: Some companies present a measure of "free cash flow," which is typically
calculated as cash flows from operating activities as presented in the statement of cash
flows under GAAP, less capital expenditures. Does Item 10(e)(1)(ii) of Regulation SK
prohibit this measure in documents filed with the Commission?
Answer: No. The deduction of capital expenditures from the GAAP financial measure of
cash flows from operating activities would not violate the prohibitions in Item 10(e)(1)(ii).
However, companies should be aware that this measure does not have a uniform
definition and its title does not describe how it is calculated. Accordingly, a clear description
of how this measure is calculated, as well as the necessary reconciliation, should
accompany the measure where it is used. Companies should also avoid inappropriate or
potentially misleading inferences about its usefulness. For example, "free cash flow"
should not be used in a manner that inappropriately implies that the measure represents
the residual cash flow available for discretionary expenditures, since many companies
have mandatory debt service requirements or other nondiscretionary expenditures that
are not deducted from the measure. Also, free cash flow is a liquidity measure that must
not be presented on a per share basis. See Question 102.05. [May 17, 2016]
Question 102.08
Question: Does Item 10(e) of Regulation SK apply to filed free writing prospectuses?
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Answer: Regulation SK applies to registration statements filed under the Securities Act,
as well as registration statements, periodic and current reports and other documents filed
under the Exchange Act. A free writing prospectus is not filed as part of the issuer's
registration statement, unless the issuer files it on Form 8K or otherwise includes it or
incorporates it by reference into the registration statement. Therefore, Item 10(e) of
Regulation SK does not apply to a filed free writing prospectus unless the free writing
prospectus is included in or incorporated by reference into the issuer's registration
statement or included in an Exchange Act filing. [Jan. 11, 2010]
Question 102.09
Question: Item 10(e)(1)(ii)(A) of Regulation SK prohibits "excluding charges or liabilities
that required, or will require, cash settlement, or would have required cash settlement
absent an ability to settle in another manner, from nonGAAP liquidity measures, other
than the measures earnings before interest and taxes (EBIT) and earnings before interest,
taxes, depreciation and amortization (EBITDA)." A company's credit agreement contains a
material covenant regarding the nonGAAP financial measure "Adjusted EBITDA." If
disclosed in a filing, the nonGAAP financial measure "Adjusted EBITDA" would violate
Item 10(e), as it excludes charges that are required to be cash settled. May a company
nonetheless disclose this nonGAAP financial measure?
Answer: Yes. The prohibition in Item 10(e) notwithstanding, because MD&A requires
disclosure of material items affecting liquidity, if management believes that the credit
agreement is a material agreement, that the covenant is a material term of the credit
agreement and that information about the covenant is material to an investor's
understanding of the company's financial condition and/or liquidity, then the company
may be required to disclose the measure as calculated by the debt covenant as part of its
MD&A. In disclosing the nonGAAP financial measure in this situation, a company should
consider also disclosing the following:
the material terms of the credit agreement including the covenant;
the amount or limit required for compliance with the covenant; and
the actual or reasonably likely effects of compliance or noncompliance with the
covenant on the company's financial condition and liquidity. [Jan. 11, 2010]
Question 102.10
Question: Item 10(e)(1)(i)(A) of Regulation SK requires that when a registrant presents
a nonGAAP measure it must present the most directly comparable GAAP measure with
equal or greater prominence. This requirement applies to nonGAAP measures presented
in documents filed with the Commission and also earnings releases furnished under Item
2.02 of Form 8K. Are there examples of disclosures that would cause a nonGAAP
measure to be more prominent?
Answer: Yes. Although whether a nonGAAP measure is more prominent than the
comparable GAAP measure generally depends on the facts and circumstances in which the
disclosure is made, the staff would consider the following examples of disclosure of non
GAAP measures as more prominent:
Presenting a full income statement of nonGAAP measures or presenting a full non
GAAP income statement when reconciling nonGAAP measures to the most directly
comparable GAAP measures;
Omitting comparable GAAP measures from an earnings release headline or caption that
includes nonGAAP measures;
Presenting a nonGAAP measure using a style of presentation (e.g., bold, larger font)
that emphasizes the nonGAAP measure over the comparable GAAP measure;
A nonGAAP measure that precedes the most directly comparable GAAP measure
(including in an earnings release headline or caption);
Describing a nonGAAP measure as, for example, “record performance” or
“exceptional” without at least an equally prominent descriptive characterization of the
comparable GAAP measure;
Providing tabular disclosure of nonGAAP financial measures without preceding it with
an equally prominent tabular disclosure of the comparable GAAP measures or including
the comparable GAAP measures in the same table;
Excluding a quantitative reconciliation with respect to a forwardlooking nonGAAP
measure in reliance on the “unreasonable efforts” exception in Item 10(e)(1)(i)(B)
without disclosing that fact and identifying the information that is unavailable and its
probable significance in a location of equal or greater prominence; and
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Providing discussion and analysis of a nonGAAP measure without a similar discussion
and analysis of the comparable GAAP measure in a location with equal or greater
prominence. [May 17, 2016]
Question 102.11
Question: How should income tax effects related to adjustments to arrive at a nonGAAP
measure be calculated and presented?
Answer: A registrant should provide income tax effects on its nonGAAP measures
depending on the nature of the measures. If a measure is a liquidity measure that
includes income taxes, it might be acceptable to adjust GAAP taxes to show taxes paid in
cash. If a measure is a performance measure, the registrant should include current and
deferred income tax expense commensurate with the nonGAAP measure of profitability.
In addition, adjustments to arrive at a nonGAAP measure should not be presented “net
of tax.” Rather, income taxes should be shown as a separate adjustment and clearly
explained. [May 17, 2016]
Question 102.12
Question: A registrant discloses a financial measure or information that is not in
accordance with GAAP or calculated exclusively from amounts presented in accordance
with GAAP. In some circumstances, this financial information may have been prepared in
accordance with guidance published by a government, governmental authority or self
regulatory organization that is applicable to the registrant, although the information is not
required disclosure by the government, governmental authority or selfregulatory
organization. Is this information considered to be a "nonGAAP financial measure" for
purposes of Regulation G and Item 10 of Regulation SK?
Answer: Yes. Unless this information is required to be disclosed by a system of regulation
that is applicable to the registrant, it is considered to be a "nonGAAP financial measure"
under Regulation G and Item 10 of Regulation SK. Registrants that disclose such
information must provide the disclosures required by Regulation G or Item 10 of
Regulation SK, if applicable, including the quantitative reconciliation from the nonGAAP
financial measure to the most comparable measure calculated in accordance with GAAP.
This reconciliation should be in sufficient detail to allow a reader to understand the nature
of the reconciling items. [Apr. 24, 2009]
Section 103. EBIT and EBITDA
Question 103.01
Question: Exchange Act Release No. 47226 describes EBIT as "earnings before interest
and taxes" and EBITDA as "earnings before interest, taxes, depreciation and
amortization." What GAAP measure is intended by the term "earnings"? May measures
other than those described in the release be characterized as "EBIT" or "EBITDA"? Does
the exception for EBIT and EBITDA from the prohibition in Item 10(e)(1)(ii)(A) of
Regulation SK apply to these other measures?
Answer: "Earnings" means net income as presented in the statement of operations
under GAAP. Measures that are calculated differently than those described as EBIT and
EBITDA in Exchange Act Release No. 47226 should not be characterized as "EBIT" or
"EBITDA" and their titles should be distinguished from "EBIT" or "EBITDA," such as
"Adjusted EBITDA." These measures are not exempt from the prohibition in Item 10(e)(1)
(ii)(A) of Regulation SK, with the exception of measures addressed in Question 102.09.
[Jan. 11, 2010]
Question 103.02
Question: If EBIT or EBITDA is presented as a performance measure, to which GAAP
financial measure should it be reconciled?
Answer: If a company presents EBIT or EBITDA as a performance measure, such
measures should be reconciled to net income as presented in the statement of operations
under GAAP. Operating income would not be considered the most directly comparable
GAAP financial measure because EBIT and EBITDA make adjustments for items that are
not included in operating income. In addition, these measures must not be presented on a
per share basis. See Question 102.05. [May 17, 2016]
Section 104. Segment Information
Question 104.01
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Question: Is segment information that is presented in conformity with Accounting
Standards Codification 280, pursuant to which a company may determine segment
profitability on a basis that differs from the amounts in the consolidated financial
statements determined in accordance with GAAP, considered to be a nonGAAP financial
measure under Regulation G and Item 10(e) of Regulation SK?
Answer: No. NonGAAP financial measures do not include financial measures that are
required to be disclosed by GAAP. Exchange Act Release No. 47226 lists "measures of
profit or loss and total assets for each segment required to be disclosed in accordance with
GAAP" as examples of such measures. The measure of segment profit or loss and segment
total assets under Accounting Standards Codification 280 is the measure reported to the
chief operating decision maker for purposes of making decisions about allocating resources
to the segment and assessing its performance.
The list of examples in Exchange Act Release No. 47226 is not exclusive. As an additional
example, because Accounting Standards Codification 280 requires or expressly permits the
footnotes to the company's consolidated financial statements to include specific additional
financial information for each segment, that information also would be excluded from the
definition of nonGAAP financial measures. [Jan. 11, 2010]
Question 104.02
Question: Does Item 10(e)(1)(ii) of Regulation SK prohibit the discussion in MD&A of
segment information determined in conformity with Accounting Standards Codification
280?
Answer: No. Where a company includes in its MD&A a discussion of segment profitability
determined consistent with Accounting Standards Codification 280, which also requires
that a footnote to the company's consolidated financial statements provide a
reconciliation, the company also should include in the segment discussion in the MD&A a
complete discussion of the reconciling items that apply to the particular segment being
discussed. In this regard, see Financial Reporting Codification Section 501.06.a, footnote
28. [Jan. 11, 2010]
Question 104.03
Question: Is a measure of segment profit/loss or liquidity that is not in conformity with
Accounting Standards Codification 280 a nonGAAP financial measure under Regulation G
and Item 10(e) of Regulation SK?
Answer: Yes. Segment measures that are adjusted to include amounts excluded from, or
to exclude amounts included in, the measure reported to the chief operating decision
maker for purposes of making decisions about allocating resources to the segment and
assessing its performance do not comply with Accounting Standards Codification 280.
Such measures are, therefore, nonGAAP financial measures and subject to all of the
provisions of Regulation G and Item 10(e) of Regulation SK. [Jan. 11, 2010]
Question 104.04
Question: In the footnote that reconciles the segment measures to the consolidated
financial statements, a company may total the profit or loss for the individual segments as
part of the Accounting Standards Codification 280 required reconciliation. Would the
presentation of the total segment profit or loss measure in any context other than the
Accounting Standards Codification 280 required reconciliation in the footnote be the
presentation of a nonGAAP financial measure?
Answer: Yes. The presentation of the total segment profit or loss measure in any context
other than the Accounting Standards Codification 280 required reconciliation in the
footnote would be the presentation of a nonGAAP financial measure because it has no
authoritative meaning outside of the Accounting Standards Codification 280 required
reconciliation in the footnotes to the company's consolidated financial statements. [Jan.
11, 2010]
Question 104.05
Question: Company X presents a table illustrating a breakdown of revenues by certain
products, but does not sum this to the revenue amount presented on Company X's
financial statements. Is the information in the table considered a nonGAAP financial
measure under Regulation G and Item 10(e) of Regulation SK?
Answer: No, assuming the product revenue amounts are calculated in accordance with
GAAP. The presentation would be considered a nonGAAP financial measure, however, if
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the revenue amounts are adjusted in any manner. [Jan. 11, 2010]
Question 104.06
Question: Company X has operations in various foreign countries where the local
currency is used to prepare the financial statements which are translated into the
reporting currency under the applicable accounting standards. In preparing its MD&A,
Company X will explain the reasons for changes in various financial statement captions. A
portion of these changes will be attributable to changes in exchange rates between
periods used for translation. Company X wants to isolate the effect of exchange rate
differences and will present financial information in a constant currency — e.g., assume a
constant exchange rate between periods for translation. Would such a presentation be
considered a nonGAAP measure under Regulation G and Item 10(e) of Regulation SK?
Answer: Yes. Company X may comply with the reconciliation requirements of Regulation
G and Item 10(e) by presenting the historical amounts and the amounts in constant
currency and describing the process for calculating the constant currency amounts and
the basis of presentation. [Jan. 11, 2010]
Section 105. Item 2.02 of Form 8K
Question 105.01
Question: Item 2.02 of Form 8K contains a conditional exemption from its requirement
to furnish a Form 8K where earnings information is presented orally, telephonically, by
webcast, by broadcast or by similar means. Among other conditions, the company must
provide on its web site any financial and other statistical information contained in the
presentation, together with any information that would be required by Regulation G.
Would an audio file of the initial webcast satisfy this condition to the exemption?
Answer: Yes, provided that: (1) the audio file contains all material financial and other
statistical information included in the presentation that was not previously disclosed, and
(2) investors can access it and replay it through the company's web site. Alternatively,
slides or a similar presentation posted on the web site at the time of the presentation
containing the required, previously undisclosed, material financial and other statistical
information would satisfy the condition. In each case, the company must provide all
previously undisclosed material financial and other statistical information, including
information provided in connection with any questions and answers. Regulation FD also
may impose disclosure requirements in these circumstances. [Jan. 11, 2010]
Question 105.02
Question: Item 2.02 of Form 8K contains a conditional exemption from its requirement
to furnish a Form 8K where earnings information is presented orally, telephonically, by
webcast, by broadcast or by similar means. Among other conditions, the company must
provide on its web site any material financial and other statistical information not
previously disclosed and contained in the presentation, together with any information that
would be required by Regulation G. When must all of this information appear on the
company's web site?
Answer: The required information must appear on the company's web site at the time
the oral presentation is made. In the case of information that is not provided in a
presentation itself but, rather, is disclosed unexpectedly in connection with the question
and answer session that was part of that oral presentation, the information must be
posted on the company's web site promptly after it is disclosed. Any requirements of
Regulation FD also must be satisfied. A webcast of the oral presentation would be
sufficient to meet this requirement. [Jan. 11, 2010]
Question 105.03
Question: Does a company's failure to furnish to the Commission the Form 8K required
by Item 2.02 in a timely manner affect the company's eligibility to use Form S3?
Answer: No. Form S3 requires the company to have filed in "a timely manner all reports
required to be filed in twelve calendar months and any portion of a month immediately
preceding the filing of the registration statement." Because an Item 2.02 Form 8K is
furnished to the Commission, rather than filed with the Commission, failure to furnish
such a Form 8K in a timely manner would not affect a company's eligibility to use Form
S3. While not affecting a company's Form S3 eligibility, failure to comply with Item 2.02
of Form 8K would, of course, be a violation of Section 13(a) of the Exchange Act and the
rules thereunder. [Jan. 11, 2010]
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Question 105.04 [withdrawn]
Question 105.05
Question: Company X files its quarterly earnings release as an exhibit to its Form 10Q
on Wednesday morning, prior to holding its earnings conference call Wednesday
afternoon. Assuming that all of the other conditions of Item 2.02(b) are met, may the
company rely on the exemption for its conference call even if it does not also furnish the
earnings release in an Item 2.02 Form 8K?
Answer: Yes. Company X's filing of the earnings release as an exhibit to its Form 10Q,
rather than in an Item 2.02 Form 8K, before the conference call takes place, would not
preclude reliance on the exemption for the conference call. [Jan. 11, 2010]
Question 105.06
Question: Company A issues a press release announcing its results of operations for a
justcompleted fiscal quarter, including its expected adjusted earnings (a nonGAAP
financial measure) for the fiscal period. Would this press release be subject to Item 2.02 of
Form 8K?
Answer: Yes, because it contains material, nonpublic information regarding its results of
operations for a completed fiscal period. The adjusted earnings range presented would be
subject to the requirements of Item 2.02 applicable to nonGAAP financial measures. [Jan.
11, 2010]
Question 105.07
Question: A company issues its earnings release after the close of the market and holds
a properly noticed conference call to discuss its earnings two hours later. That conference
call contains material, previously undisclosed, information of the type described under
Item 2.02 of Form 8K. Because of this timing, the company is unable to furnish its
earnings release on a Form 8K before its conference call. Accordingly, the company
cannot rely on the exemption from the requirement to furnish the information in the
conference call on a Form 8K. What must the company file with regard to its conference
call?
Answer: The company must furnish the material, previously nonpublic, financial and
other statistical information required to be furnished on Item 2.02 of Form 8K as an
exhibit to a Form 8K and satisfy the other requirements of Item 2.02 of Form 8K. A
transcript of the portion of the conference call or slides or a similar presentation including
such information will satisfy this requirement. In each case, all material, previously
undisclosed, financial and other statistical information, including that provided in
connection with any questions and answers, must be provided. [Jan. 15, 2010]
Section 106. Foreign Private Issuers
Question 106.01
Question: The Note to Item 10(e) of Regulation SK permits a foreign private issuer to
include in its filings a nonGAAP financial measure that otherwise would be prohibited by
Item 10(e)(1)(ii) if, among other things, the nonGAAP financial measure is required or
expressly permitted by the standard setter that is responsible for establishing the GAAP
used in the company's primary financial statements included in its filing with the
Commission. What does "expressly permitted" mean?
Answer: A measure is "expressly permitted" if the particular measure is clearly and
specifically identified as an acceptable measure by the standard setter that is responsible
for establishing the GAAP used in the company's primary financial statements included in
its filing with the Commission.
The concept of "expressly permitted" can be also be demonstrated with explicit acceptance
of a presentation by the primary securities regulator in the foreign private issuer's home
country jurisdiction or market. Explicit acceptance by the regulator would include (1)
published views of the regulator or members of the regulator's staff or (2) a letter from
the regulator or its staff to the foreign private issuer indicating the acceptance of the
presentation — which would be provided to the Commission's staff upon request. [Jan. 11,
2010]
Question 106.02
Question: A foreign private issuer furnishes a press release on Form 6K that includes a
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section with nonGAAP financial measures. Can a foreign private issuer incorporate by
reference into a Securities Act registration statement only those portions of the furnished
press release that do not include the nonGAAP financial measures?
Answer: Yes. Reports on Form 6K are not incorporated by reference automatically into
Securities Act registration statements. In order to incorporate a Form 6K into a Securities
Act registration statement, a foreign private issuer must specifically provide for such
incorporation by reference in the registration statement and in any subsequently
submitted Form 6K. See Item 6(c) of Form F3. Where a foreign private issuer wishes to
incorporate by reference a portion or portions of the press release provided on a Form 6K,
the foreign private issuer should either: (1) specify in the Form 6K those portions of the
press release to be incorporated by reference, or (2) furnish two Form 6K reports, one
that contains the full press release and another that contains the portions that would be
incorporated by reference (and specifies that the second Form 6K is so incorporated).
Using a separate report on Form 6K containing the portions that would be incorporated
by reference may provide more clarity for investors in most circumstances. A company
must also consider whether its disclosure is rendered misleading if it incorporates only a
portion (or portions) of a press release. [Jan. 11, 2010]
Question 106.03
Question: A foreign private issuer publishes a nonGAAP financial measure that does not
comply with Regulation G, in reliance on Rule 100(c), and then furnishes the information
in a report on Form 6K. Must the foreign private issuer comply with Item 10(e) of
Regulation SK with respect to that information if the company chooses to incorporate
that Form 6K report into a filed Securities Act registration statement (other than an
MJDS registration statement)?
Answer: Yes, the company must comply with all of the provisions of Item 10(e) of
Regulation SK. [Jan. 11, 2010]
Question 106.04
Question: If a Canadian company includes a nonGAAP financial measure in an annual
report on Form 40F, does the company need to comply with Regulation G or Item 10(e)
of Regulation SK with respect to that information if the company files a nonMJDS
Securities Act registration statement that incorporates by reference the Form 40F?
Answer: No. Information included in a Form 40F is not subject to Regulation G or Item
10(e) of Regulation SK. [Jan. 11, 2010]
Section 107. Voluntary Filers
Question 107.01
Question: Section 15(d) of the Exchange Act suspends automatically its application to
any company that would be subject to the filing requirements of that section where, if
other conditions are met, on the first day of the company's fiscal year it has fewer than
300 holders of record of the class of securities that created the Section 15(d) obligation.
This suspension, which relates to the fiscal year in which the fewer than 300 record
holders determination is made on the first day thereof, is automatic and does not require
any filing with the Commission. The Commission adopted Rule 15d6 under the Exchange
Act to require the filing of a Form 15 as a notice of the suspension of a company's
reporting obligation under Section 15(d). Such a filing, however, is not a condition to the
suspension. A number of companies whose Section 15(d) reporting obligation is
suspended automatically by the statute choose not to file the notice required by Rule 15d
6 and continue to file Exchange Act reports as though they continue to be required. Must
a company whose reporting obligation is suspended automatically by Section 15(d) but
continues to file periodic reports as though it were required to file periodic reports comply
with Regulation G and the requirements of Item 10(e) of Regulation SK?
Answer: Yes. Regulation SK relates to filings with the Commission. Accordingly, a
company that is making filings as described in this question must comply with Regulation
SK or Form 20F, as applicable, in its filings.
As to other public communications, any company "that has a class of securities registered
under Section 12 of the Securities Exchange Act of 1934, or is required to file reports
under Section 15(d) of the Securities Exchange Act of 1934" must comply with
Regulation G. The application of this standard to those companies that no longer are
"required" to report under Section 15(d) but choose to continue to report presents a
difficult dilemma, as those companies technically are not subject to Regulation G but their
continued filing is intended to and does give the appearance that they are a public
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company whose disclosure is subject to the Commission's regulations. It is reasonable
that this appearance would cause shareholders and other market participants to expect
and rely on a company's required compliance with the requirements of the federal
securities laws applicable to companies reporting under Section 15(d). Accordingly, while
Regulation G technically does not apply to a company such as the one described in this
question, the failure of such a company to comply with all requirements (including
Regulation G) applicable to a Section 15(d)reporting company can raise significant issues
regarding that company's compliance with the antifraud provisions of the federal
securities laws. [Jan. 11, 2010]
Section 108. Compensation Discussion and Analysis/Proxy Statement
Question 108.01
Question: Instruction 5 to Item 402(b) provides that "[d]isclosure of target levels that
are nonGAAP financial measures will not be subject to Regulation G and Item 10(e);
however, disclosure must be provided as to how the number is calculated from the
registrant's audited financial statements." Does this instruction extend to nonGAAP
financial information that does not relate to the disclosure of target levels, but is
nevertheless included in Compensation Discussion & Analysis ("CD&A") or other parts of
the proxy statement for example, to explain the relationship between pay and
performance?
Answer: No. Instruction 5 to Item 402(b) is limited to CD&A disclosure of target levels
that are nonGAAP financial measures. If nonGAAP financial measures are presented in
CD&A or in any other part of the proxy statement for any other purpose, such as to
explain the relationship between pay and performance or to justify certain levels or
amounts of pay, then those nonGAAP financial measures are subject to the requirements
of Regulation G and Item 10(e) of Regulation SK.
In these payrelated circumstances only, the staff will not object if a registrant includes
the required GAAP reconciliation and other information in an annex to the proxy
statement, provided the registrant includes a prominent crossreference to such annex.
Or, if the nonGAAP financial measures are the same as those included in the Form 10K
that is incorporating by reference the proxy statement's Item 402 disclosure as part of its
Part III information, the staff will not object if the registrant complies with Regulation G
and Item 10(e) by providing a prominent crossreference to the pages in the Form 10K
containing the required GAAP reconciliation and other information. [July 8, 2011]
Modified: May 17, 2016
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10/10
March 1, 2016
NDS 2016-02
New Developments Summary
FASB issues new lease accounting standard
Long-awaited guidance brings most leases on balance sheet for lessees
Overview
On February 25, the FASB released ASU 2016-02, Leases, completing its project to overhaul lease
accounting. The ASU codifies ASC 842, Leases, which will replace the guidance in ASC 840. The new
guidance is effective for public business entities in fiscal years beginning after December 15, 2018. The
effective date for most other entities is deferred for one year, meaning that most calendar-year private
companies will be required to adopt the new standard in 2020. Early adoption is permitted for all entities.
Entities should be aware of the following key points about the new FASB standard:

Lessees will be required to recognize most leases “on balance sheet.”

The new guidance retains a dual lease accounting model for purposes of income statement
recognition, continuing the distinction between what are currently known as “capital” and “operating”
leases for lessees.

Lessors will focus on whether control of the underlying asset has transferred to the lessee to assess
lease classification.

A new definition of a “lease” could cause some contracts formerly accounted for under ASC 840 to
fall outside the scope of ASC 842, and vice versa.

A modified retrospective transition will be required, although there are significant elective transition
reliefs available for both lessors and lessees.
The IASB also recently issued a new lease accounting standard that differs from the FASB model
primarily with respect to classification (the IASB model does not distinguish between different types of
leases) and practical expedients (the IASB model provides a practical expedient for low-value leases).
This bulletin provides a high-level summary of the new standard, including transition guidance. Given its
pervasive impact, both lessors and lessees should begin planning their transition to ASC 842 as soon as
possible.
2
Definition of a ‘lease’
The new standard defines a “lease” as a contract or part of a contract that conveys the right to control the
use of identified property, plant, and equipment for a period of time in exchange for consideration. Under
the new guidance, an entity will determine whether a contract is or contains a lease by assessing whether
the customer has both (a) the right to obtain substantially all of the economic benefits from using the
asset, and (b) the right to direct the use of the asset. If both these criteria are met, then a contract is or
contains a lease.
ASC 842 includes additional guidance, including examples, to assist preparers with evaluating whether a
contract meets the definition of a lease.
In addition to amending the definition of a lease, the new standard will narrow the definition of “initial
direct costs” so that they include only incremental costs that an entity would not have incurred had the
lease not been executed.
Lease classification model
The new lease accounting standard requires lessees to recognize most leases on the balance sheet.
While it will still be necessary for lessees to distinguish between “operating” and “financing” (formerly
known as “capital”) leases, and for lessors to distinguish between sales-type, direct financing, and
operating leases, these distinctions will primarily affect how a lessee or lessor must recognize expense or
income, respectively, in its income statement.
Under the new guidance, a lease is a financing lease for a lessee, and a sales-type lease for a lessor, if
the lessee effectively obtains control of the underlying asset. A lessee has effectively obtained control of
the underlying asset if the lease meets any one of the following criteria at lease commencement:

The lease transfers ownership of the asset to the lessee by the end of the lease term.

The lessee has a bargain purchase option.

The lease term is for the major part of the remaining economic life of the asset. Entities will disregard
this criterion if the lease commences at or near the end of the asset’s useful life.

The present value of the lease payments, plus the residual value guaranteed by the lessee that is not
already included in the lease payments, amounts to at least substantially all of the fair value of the
leased asset.

The underlying asset is specialized such that it is expected to have no alternative use to the lessor at
the end of the lease term.
While these criteria are similar to the classification criteria in ASC 840, they are not necessarily intended
to be applied by referencing the quantitative thresholds in ASC 840. Nevertheless, to ease
implementation of the new guidance, the FASB states in ASC 842-10-55-2 that applying the following
thresholds is a reasonable approach to assess certain of these criteria:

75 percent or more is a major part of an asset’s remaining economic life.

90 percent or more is substantially all of an asset’s fair value.

An asset is at or near the end of its economic life when 25 percent or less of its economic life
remains.
3
“Lease term” is defined similarly under ASC 842 as under ASC 840. Likewise, “lease payments” is
defined similarly under ASC 842 as “minimum lease payments” is defined under ASC 840.
Also similar to ASC 840, the discount rate used to present value the lease payments under ASC 842 is
equal to the rate implicit in the lease. However, unlike previous guidance, ASC 842 requires an entity to
add deferred initial direct costs to the asset’s fair value for purposes of computing the rate implicit in the
lease.
If the lessee cannot readily determine the rate implicit in the lease, it is permitted to use its incremental
borrowing rate as the discount rate. ASC 842 provides a new practical expedient for lessees that are not
public business entities: As an accounting policy election for all leases, a lessee is permitted to use a risk
free discount rate, determined using a period comparable to the lease term.
Lessee accounting
For most leases, a lessee will recognize a right-of-use (ROU) asset and a lease liability, unless it elects
the new practical expedient for short-term leases. If the original lease term is 12 months or less, and the
lease does not contain a purchase option that the lessee is reasonably certain to exercise, a lessee is
permitted to forego recognizing an ROU asset and lease liability on its balance sheet, effectively applying
the operating lease model in ASC 840. Leases with renewal options that would extend the lease term
beyond 12 months will qualify for the practical expedient as long as renewal is not reasonably certain at
the beginning of the lease term.
Under the new guidance, a lessee will generally be required to initially measure both the ROU asset and
the lease liability at the present value of the remaining lease payments. Lessees will also capitalize initial
direct costs as part of the ROU asset. Subsequent measurement will depend on the type of lease. A
lessee will also assess the ROU asset for impairment under ASC 360, Property, Plant, and Equipment.
If a lease does not meet any of the criteria in ASC 842-10-25-2 (see “Updated lease classification model”
section, above), then it is an operating lease for the lessee.
For most operating leases, a lessee will recognize rental expense in a similar pattern to that prescribed
under ASC 840. In other words, rental expense will be recognized on a straight-line basis over the lease
term, unless another systematic and rational approach better represents the pattern in which the lessee
expects to derive benefits from its right to use the leased asset.
For finance leases, a lessee will recognize rental expense in a similar manner to capital leases under
ASC 840. Therefore, a lessee will recognize interest expense based on either the interest rate implicit in
the lease, its incremental borrowing rate, or the risk free rate if applicable, and amortize the ROU asset
over the shorter of its useful life or the lease term.
Much of the guidance related to build-to-suit and sale-leaseback arrangements, two particularly complex
areas of lease accounting, has been eliminated. The new standard contains guidance for sale-leaseback
arrangements, but it is much less prescriptive than the guidance in ASC 840-40, Sale-Leaseback
Transactions, especially for real estate transactions.
Lessor accounting
Under ASC 842, a lessor will account for a lease as a sales-type, direct financing, or operating lease. To
determine the appropriate classification, a lessor will first assess whether a lease meets any of the salestype lease criteria mentioned earlier in the “Updated lease classification model” section. If any one of
those criteria is met, then control of the asset is deemed to have transferred to the lessee, and the lessor
4
will derecognize the asset and recognize both its net investment in the lease and any resulting profit or
loss, provided that collectibility of the lease payments and any amount necessary to satisfy a residual
value guarantee from the lessee is probable at the commencement date. If collectibility is not probable,
then the lessor will not derecognize the asset, and will account for any lease payments received as a
deposit liability.
For sales-type leases, if the asset’s fair value is different than its carrying amount at the lease
commencement date, then the lessor is required to expense any initial direct costs at the commencement
date. Otherwise, the lessor must defer any initial direct costs by including them in the net investment in
the lease. After commencement, a lessor in a sales-type lease will recognize interest income using the
interest method.
If none of the sales-type lease criteria are met, then control did not transfer to the lessee, and the lessor
will classify the lease as either a direct financing or an operating lease. The new standard identifies a
lease as a direct financing lease when both (a) the present value of the lease payments, plus any residual
value guaranteed by the lessee (not already included in the lease payments) or another party unrelated to
the lessor, equals at least substantially all of the asset’s fair value, and (b) it is probable that the lessor
will collect all of the lease payments and any amount necessary to satisfy a residual value guarantee. If
either of these criteria is not met, then the lessor is required to account for the lease as an operating
lease.
For a direct financing lease, a lessor will derecognize the leased asset and recognize both an investment
in the lease and any loss incurred. If the lessor computes a gain upon derecognizing the leased asset, the
profit will be deferred and recognized over the lease term. A lessor is required to defer any initial direct
costs associated with a direct financing lease by including them in the net investment in the lease.
After commencement, a lessor in a direct financing lease will recognize interest income using the interest
method.
Lessors will account for operating leases in the same manner as under ASC 840. That is, operating lease
income will be recognized on a straight-line basis over the lease term, unless another systematic and
rational basis better represents the pattern in which the lessee derives benefits from the leased asset. A
lessor is required to defer any initial direct costs associated with an operating lease, and recognize them
as an expense over the lease term on the same basis as lease income.
Separating lease and nonlease components
Both lessees and lessors are required to allocate arrangement consideration among lease and nonlease
components of a contract. Lessors will follow the allocation guidance in ASC 606, Revenue from
Contracts with Customers. Lessees will allocate consideration based on relative stand-alone selling
prices, unless they elect to apply a practical expedient whereby they will account for lease and nonlease
components together as a single lease component. Lessees are permitted to elect this practical expedient
by class of underlying asset.
5
Separation anxiety
Although ASC 840 requires entities to evaluate multiple-element arrangements to identify lease
and nonlease components, as a practical matter, some lessees might not currently separate the
lease and nonlease elements for accounting purposes because both operating leases and the
related service elements are accounted for similarly.
Under ASC 842, lessees will be required to recognize an ROU asset and a lease liability for the
lease element, but not for service elements, within a full-service lease contract. Therefore,
lessees with leases that contain both lease and nonlease elements might need to account
separately for those elements. To the extent that a lessee currently lacks sufficient information
to separately account for lease and nonlease components of arrangements involving an
operating lease, it might need to ask the lessor(s) whether that information can be provided.
The practical expedient to account for a single lease component could significantly reduce the
cost for a lessee transitioning to the new standard in this regard, but will likely increase the
amounts recognized on the balance sheet if significant nonlease components are reflected in
the ROU asset and lease liability.
Transition
Lessors and lessees are required to apply a modified retrospective transition approach, which requires
adjusting the accounting for any leases existing at the beginning of the earliest comparative period
presented in the adoption-period financial statements (“initial application date”). Any leases that expire
before the initial application date will not require any accounting adjustment.
Smooth transition
The Board recognized that lessors and lessees might struggle with the modified retrospective
transition approach due to the magnitude and scope of many entities’ leasing activities, so there
are several transition reliefs in the final standard (described below). As entities begin to plan
their transition to ASC 842, they should consider early on whether they intend to utilize any of
the transition reliefs and plan their transition activities accordingly.
Lessees are required to apply the transition guidance to leases existing at the initial application date as
follows:

For former capital leases classified as finance leases:

Recognize an ROU asset and a lease liability based on the carrying amount of the capital lease
asset and capital lease obligation, respectively, as measured under ASC 840

Recognize any unamortized initial direct costs that qualify for capitalization under ASC 842 as a
component of the ROU asset


6

Recognize any unamortized initial direct costs that do not qualify for capitalization under ASC 842
as an adjustment to equity

For the period between the initial application date and the effective date, subsequently measure
the ROU asset and the lease liability based on the guidance in ASC 840

Beginning on the effective date, measure the ROU asset and lease liability based on the
guidance in ASC 842, except for adjustments based on changes in the amount a lessee expects
to pay under a residual value guarantee
For former capital leases classified as operating leases:

Derecognize the capital lease asset and obligation and account for any difference in their carrying
amounts in the same manner as prepaid or accrued rent

Recognize an ROU asset and a lease liability based on the subsequent measurement guidance
in ASC 842 for operating leases if the lease commenced before the beginning of the earliest
period presented

Recognize an ROU asset and a lease liability based on the initial measurement guidance in
ASC 842 if the lease commenced after the beginning of the earliest period presented

Subsequently account for the lease in accordance with ASC 842

For former operating leases:

Recognize a lease liability based on the present value of the remaining “minimum lease
payments” as defined in ASC 840, adjusted for the present value of any amounts that are
probable of being owed by the lessee under a residual value guarantee using a discount rate
established under ASC 842

For operating leases under ASC 842:

Recognize an ROU asset based on the carrying amount of the lease liability, adjusted for
prepaid or accrued rent, lease incentives, unamortized initial direct costs that qualify for
capitalization under ASC 842, and impairment of the ROU asset

Subsequently measure the ROU asset throughout the remaining lease term based on the
subsequent measurement guidance in ASC 842

For finance leases under ASC 842, measure the ROU asset as the applicable proportion of the
lease liability at the commencement date, calculated using the ratio of the remaining lease term at
the beginning of the earliest period presented to the total lease term, and adjusted by the carrying
amount of any prepaid or accrued lease payments

The transition guidance for lessors is similar to that for lessees. Refer to ASC 842-10-65-1 for details
regarding lessor transition.
7
Lessors and lessees can elect, but only as a package for all leases, not to reassess the following
circumstances upon transition:

Whether any expired or existing contracts are or contain leases

Classification for any expired or existing leases

Whether initial direct costs for any existing leases qualify for capitalization under ASC 842
As a separate transition relief, both lessors and lessees are also permitted, as a policy election applicable
to all existing leases, to use hindsight in determining the lease term with respect to lease renewals and
purchase options, and in evaluating the ROU asset for impairment.
© 2016 Grant Thornton LLP, U.S. member firm of Grant Thornton International Ltd. All rights reserved.
This Grant Thornton LLP bulletin provides information and comments on current accounting issues and
developments. It is not a comprehensive analysis of the subject matter covered and is not intended to
provide accounting or other advice or guidance with respect to the matters addressed in the bulletin. All
relevant facts and circumstances, including the pertinent authoritative literature, need to be considered to
arrive at conclusions that comply with matters addressed in this bulletin.
For additional information on topics covered in this bulletin, contact your Grant Thornton LLP
professional.
No. US2016-02
March 02, 2016
What’s inside:
Background ..................... 1
Key provisions ................. 1
Definition and scope ................1
Contract consideration and
allocation ............................. 4
Lessee accounting model ........ 5
Lessor accounting model........ 6
Lease term............................... 9
Lease payments ...................... 9
Initial direct costs ................. 10
Lease modification ............... 10
Re-assessment .......................12
Contract combinations ..........13
Subleases ................................13
Related-party leases ..............13
Sale and leaseback
transactions ........................13
Build-to-suit
transactions ........................14
Disclosures ............................. 15
Observations on
significant differences
with existing
guidance ...................... 15
What’s next .................... 19
Next steps .............................. 20
The leasing standard
A comprehensive look at the new model and its impact
At a glance
On February 25, 2016, the FASB issued the new standard, Leases (ASC 842). There are
elements of the new standard that could impact almost all entities to some extent,
although lessees will likely see the most significant changes. Lessees will need to
recognize virtually all of their leases on the balance sheet, by recording a right-of-use
asset and lease liability.
The IASB issued its new standard, IFRS 16, Leases, earlier this year. While there are
significant areas of divergence between guidance applicable under US GAAP and that
required by IFRS, both Boards have noted that they met their key objectives of
recognition of lease-related assets and liabilities and enhanced transparency.
Observations about the significant differences between the new and the current lease
accounting standard can be found in paragraph 95.
Background
.1 Leasing is widely used to address a variety of business needs, from short-term asset
use to long-term asset financing. Sometimes leasing is the only option available to obtain
the use of a physical asset (e.g., one floor of an office building or a single store in a mall).
Some have long argued that the current accounting model is inadequate, as it allows
lessees to structure lease transactions to achieve off-balance sheet financing.
.2 The FASB and IASB initiated a joint project on leases in 2006 as part of their global
convergence effort to address concerns about the current approach. After issuing two
exposure drafts, extensive outreach, and re-deliberations to address the concerns raised
by stakeholders, the FASB and IASB issued separate lease accounting standards that
diverged in significant areas. This In depth is focused on the new US GAAP standard.
Key provisions
Definition and scope
.3 According to the new leasing standard, a lease conveys the right to control the use of
identified property, plant, or equipment (an identified asset) for a period of time in
exchange for consideration. A period of time may be described in relation to the amount
of usage (e.g., units produced) of the identified asset.
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In depth
1
.4 The leasing standard excludes the following arrangements from its scope (1) leases of
intangible assets, including licenses of internal-use software; (2) leases to explore for or
use minerals, oil, natural gas, and similar nonregenerative resources; (3) leases of
biological assets, including plants and living animals; (4) leases of inventory; and (5)
leases of assets under construction (construction in process).
.5 A lessee can, as an accounting policy election by class of the underlying leased asset,
elect not to apply the balance sheet recognition requirements under the new guidance to
leases with a term less than or equal to twelve months. However, a lease will no longer
meet the definition of a short-term lease if circumstances change such that either (a) the
lease term changes and the remaining lease term is more than 12 months from the end of
the previously determined lease term; or (b) contrary to its earlier determination, the
lessee becomes reasonably certain of exercising its purchase option. In either of these
cases, the lessee is required to apply the leasing standard from the date of the change in
circumstances.
.6 Whether the contract contains a lease is determined at the inception of an
arrangement. In many cases, it will be easy to determine if an arrangement contains a
lease. However, there will be times when judgment will be required to distinguish
between an arrangement to buy or sell goods or services and a lease of an underlying
asset. Reassessment of whether a contract is or contains a lease should be carried out
only if the terms and conditions of the contract are changed.
Identified asset
.7 To contain a lease, an arrangement must have an explicitly or implicitly identified
asset that is physically distinct.
Explicitly identified asset and substitution rights
.8 If an arrangement explicitly identifies the asset to be used, but the supplier has a
substantive contractual right to substitute such asset, then the arrangement does not
contain an identified asset. A substitution right is substantive if the supplier can (a)
practically use another asset to fulfill the arrangement, and (b) it is economically
beneficial for the supplier to do so. When evaluating a substitution right, the following
should be considered:

Provisions that allow the supplier to replace an asset under certain circumstances,
such as improper operation, would not preclude the arrangement containing an
identified asset.

A provision permitting or requiring a seller to substitute other assets on or after a
particular date or a specified event does not preclude the arrangement from
containing an identified asset.

If the asset is at a customer’s premises or at a location other than the supplier’s
premises, it may not be economically beneficial for a supplier to substitute the
asset since the substitution costs may be higher than the benefits of substitution.
.9 Future events not likely to occur should not be considered in the evaluation. A
customer is required to presume that the supplier does not have a substantive
substitution right if the customer is unable to readily make such a determination.
Implicitly identified asset
.10 An arrangement that does not explicitly identify an asset may do so implicitly. This
may be the case when only one asset can be used to fulfill the contract, for example,
because of economic or legal factors or because the lessor has only one asset available to
perform under the contract. When a contract permits substitution, but the asset is on the
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customer’s site, the asset may be implicitly identified due to the practical challenges of
entering the customer’s premises and substituting the asset.
Portions of assets
.11 An identified asset must be physically distinct – it is either a single asset or a distinct
portion of an asset. For example, a building or a floor within the building (if it can be
used independent of the other floors) may be considered physically distinct. However,
capacity or a portion of an asset is not an identified asset if (1) the asset is not physically
distinct (e.g., the arrangement permits use of a portion of the capacity of a fiber optic
cable); and (2) a customer does not have the right to substantially all the economic
benefits from the use of the asset (e.g., several customers share a fiber optic cable and no
one customer has substantially all of the capacity).
Control
.12 For an arrangement to contain a lease, the customer should have the right to control
the use of the identified asset throughout the period of use by possessing the right to (1)
obtain substantially all of the economic benefits from the use of such asset and (2) direct
the use of the identified asset. If a customer has the right to control the use of an
identified asset for only a portion of the term of the contract, the contract contains a lease
for that portion of the term.
.13 If the customer in the contract is a joint operation or arrangement, then the control
criterion should evaluate if the joint operation or arrangement has the right to control
the use of an identified asset throughout the period of use.
Right to obtain substantially all of the economic benefits
.14 According to the new standard, the economic benefits from the use of an identified
asset include its primary output and by-products. A customer can obtain economic
benefits from the use of an identified asset directly or indirectly, such as by using,
holding, or subleasing the asset. Only the economic benefits from use of an identified
asset within the defined scope of a customer’s rights to use the asset should be
considered.
.15 A requirement for the customer to share the cash flows from the use of the identified
asset with the supplier does not preclude the customer from deriving substantially all of
the economic benefits from the use of an asset. A common example of sharing cash flows
is a payment from the customer to the supplier based on a percentage of the sales the
customer derives from use of the asset.
Right to direct the use
.16 A customer has the right to direct the use of an identified asset throughout the period
of use if:

the customer has the right to direct how and for what purpose the asset is used
during the period of use (e.g., the right to change the type, timing, location, or
amount of output produced); or

the relevant decisions (i.e., those decisions that affect the economic benefits to be
derived from the use of the identified asset) about how and for what purpose the
asset is used are predetermined (e.g., by design or by contractual restrictions on
the asset’s use) and one of the following conditions is met:
o
the customer has the right to operate the asset without the supplier having
the right to change the operating instructions; or
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o
the customer designed the asset (or its specific aspects) before the period
of use in a way that predetermines the most relevant decisions about how
and for what purpose the asset will be used.
.17 Protective rights designed to safeguard the supplier’s interest in the identified asset
or its personnel or to ensure compliance with laws or regulations will typically not
prevent the customer from having the right to direct the use of the asset.
Contract consideration and allocation
.18 A contract may contain both lease and nonlease components. The right to use an
underlying asset is a separate lease component if (1) the lessee can benefit from the right
of use of the underlying asset either on its own or together with other resources that are
readily available (i.e., goods or services that are sold or leased separately or resources
that the lessee has already obtained) and (2) the right of use of the underlying asset is
neither highly dependent on nor highly interrelated with another right to use of
underlying assets (i.e., each right of use does not significantly affect the other).
.19 The right to use land is treated as a separate lease component unless the accounting
effect of doing so would be insignificant (e.g., separating land would have no effect on the
classification of any lease component or the amount recognized for the land lease
component would be insignificant).
.20 Components include only those items or activities that transfer a good or service to
the lessee. Provisions related to administrative tasks to initiate the lease and payment of
the lessors costs would not be components if they do not transfer a good or service to the
lessee separate from the right to use the underlying asset
Lessee
.21 Contract consideration for the lessee includes (a) lease payments, (b) any fixed
payments (such as monthly service charges) or in-substance fixed payments, less any
incentives paid or payable to the lessee, and (c) any other variable payments that depend
on an index or a rate measured using the index or rate at lease commencement date.
.22 A lessee should allocate the contract consideration to the separate lease and nonlease
components based on their relative, observable standalone prices. A price is observable if
it is the price that either the lessor or similar suppliers charge for similar lease or
nonlease components on a standalone basis. If observable standalone prices are not
readily available, the lessee should estimate the standalone prices. If an estimate of the
standalone price is highly variable or uncertain, then a residual approach can be used.
.23 Initial direct costs should be allocated to the separate lease components based on
their relative standalone prices.
.24 A lessee is required to remeasure and reallocate contract consideration upon a
remeasurement of the lease liability or upon a lease modification that is not accounted
for as a separate contract (see paragraph .67). As a practical expedient, a lessee may
make an accounting policy election by class of underlying asset to not separate nonlease
components from lease components. This election cannot be used to aggregate different
lease components. If an entity elects this practical expedient, it would account for the
nonlease and lease component together as a single lease component.
Lessor
.25 A lessor should allocate the contract consideration to the separate lease and nonlease
components in accordance with the transaction price allocation guidance in ASC 606,
Revenue from Contracts with Customers.
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.26 The contract consideration for a lessor includes (a) all amounts applicable for lessee
consideration as described in paragraph .21, and (b) any other variable payments related
specifically to nonlease components that would be included in the transaction price
under ASC 606. Measurement of the variable payments in (b) are governed by the
revenue recognition guidance. If the variable payments relate specifically or partially to a
lease component, such payments are considered variable lease payments and are not
estimated or included in the allocation of contract consideration, but are instead
recognized in the income statement in the period they are earned).
.27 A lessor should allocate any capitalized costs such as initial direct costs or contract
costs to the separate lease and nonlease components to which those costs relate.
.28 A lessor is required to remeasure and reallocate the remaining consideration in the
contract when there is a contract modification that is not accounted for as a separate
contract. A lessor should allocate changes in contract consideration in accordance with
ASC 606-10-32-42 through 32-45.
Lessee accounting model
Classification
.29 A lessee will classify each separate lease component as an operating or finance lease
at the lease commencement date and will not reassess the lease classification thereafter
unless (a) there is a change in the lessee’s assessment of the lease term or exercise of a
purchase option or (b) the contract is modified and the modification is not accounted for
as a separate lease (see paragraphs .66 and .67).
.30 A lessee will classify a lease as a finance lease when the lease meets any of the
following criteria at lease commencement:
1) The lease transfers ownership of the underlying asset to the lessee by the end of
the lease term.
2) The lease grants the lessee an option to purchase the underlying asset that the
lessee is reasonably certain to exercise.
3) The lease term is for the major part of the remaining economic life of the
underlying asset. However, if the commencement date falls at or near the end of
the economic life of the underlying asset, this criterion will not be used for lease
classification purposes.
4) The present value of the sum of lease payments and any residual value
guaranteed by the lessee that is not already reflected in lease payments equals or
exceeds substantially all of the fair value of the underlying asset. Note that for
measurement purposes, lease payments will only include amounts probable of
being owed by the lessee under a residual value guarantee.
5) The underlying asset is of such a specialized nature that it is expected to have no
alternative use to the lessor at the end of the lease term.
.31 If a lease component contains the right to use more than one underlying asset, the
lessee should consider the remaining economic life of the predominant asset in the lease
component for purposes of applying the third criterion.
Recognition and measurement
.32 The standard requires a lessee to record a right-of-use asset and a lease liability for
all leases with a lease term greater than 12 months. Thus, at the lease commencement
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date, a lessee is required to measure and record a lease liability equal to the present value
of the lease payments. The payments included in lease payments are described in
paragraph .58.
.33 The discount rate for the lease is the rate implicit in the lease, unless that rate cannot
be readily determined, in which case the lessee should use its incremental borrowing
rate. The incremental borrowing rate is determined in a manner similar to how it is
described under current lease guidance in ASC 840. Nonpublic entities are permitted to
use a risk-free rate for a period comparable to the lease term. Use of a risk-free rate is an
accounting policy election, and once elected must be utilized consistently for all leases.
.34 A lessee may determine a single discount rate to apply to a portfolio of leases
assuming its application does not create a material difference when compared to
individually determined discount rates applied to each of the leases in the portfolio.
.35 The lessee is also required to measure and record a right-of-use asset. The right-ofuse asset is equal to the sum of the following:

Amount of initial measurement of the lease liability

Payments made by a lessee to the lessor at or before the lease commencement date
minus any lease incentives received

Any initial direct costs incurred by the lessee
.36 The right-of-use asset is subject to impairment testing as a long-lived asset in
accordance with ASC 360-10-35.
.37 Although the initial measurement of the right-of-use asset and lease liability is the
same for operating and finance leases, the expense recognition and amortization of the
right-of-use asset differ significantly.
.38 Operating leases will reflect lease expense on a straight-line basis similar to current
operating leases. The straight-line expense will reflect the interest expense on the lease
liability (effective interest method) and amortization of the right-of-use asset. The
amortization is calculated as the difference between the total straight-line expense and
the interest expense on the lease liability for the period. Amortization expense associated
with the right-of-use asset will grow as interest expense on the liability declines over the
lease term. Lease expense will be presented as a single line item in the operating expense
section of the income statement.
.39 Finance leases will reflect a front-loaded expense pattern (i.e., expense per period
will decline throughout the lease term) similar to the pattern for current capital leases.
The interest expense on the lease liability (effective interest method) and amortization of
the right-of-use asset, generally straight line, will be reflected separately on the income
statement.
.40 For both operating and finance leases, variable lease payments not included in
measuring the lease liability will be recognized in the period in which the obligation for
those payments is incurred.
Lessor accounting model
.41 The FASB adopted an approach for lessors that is substantially equivalent to existing
US GAAP for sales-type leases, direct financing leases, and operating leases. Leveraged
leases have been eliminated, although lessors can continue to account for existing
leveraged leases using the current accounting guidance. Other limited changes were
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made to the lessor accounting model to align it with changes to the lessee model (e.g., to
adopt the same definitions) and the new revenue recognition standard.
Classification
.42 A lessor will classify a lease as either a sales-type, direct financing, or operating lease
at the lease commencement date and will not reassess the lease classification thereafter
unless the contract is modified and the modification is not accounted for as a separate
lease. When a lessee exercises an extension, termination, or purchase option, the lessor
will account for the exercise of that option as a contract modification. See paragraph .66
or information about modifications.
.43 A lessor will classify a lease as a sales-type lease if any one of the five criteria
specified in paragraph .30 is met. However, in order to derecognize the asset and record
revenue (as discussed in paragraph .46) collection of payments due must be probable.
.44 When none of the five criteria in paragraph .30 are met, a lessor will classify the lease
as a direct financing lease or an operating lease. A lease is a direct financing lease if the
following criteria are met:

The present value of the sum of lease payments and any residual value guaranteed
by the lessee that is not already reflected in lease payments and/or any other third
party unrelated to the lessor equals or exceeds substantially all of the fair value of
the underlying asset.

It is probable that the lessor will collect the lease payments plus any amount
necessary to satisfy a residual value guarantee.
.45 If a lease is not classified as a sales-type or direct financing lease, it is an operating
lease.
Recognition and measurement
Sales-type lease
.46 A lessor will derecognize the underlying asset and recognize (1) the net investment in
the lease; (2) selling profit or loss from the lease; and (3) initial direct costs as an expense
if, at the commencement date, the fair value of the underlying asset is different from its
carrying amount. If the fair value of the underlying asset equals its carrying amount,
initial direct costs would be deferred at the commencement date and included in the
measurement of the net investment in the lease.
.47 The net investment in the lease is comprised of:


the lease receivable, which is measured at the present value of:
o
lease payments not yet received by the lessor; and
o
any expected residual value of the underlying asset guaranteed by the
lessee or a third party unrelated to the lessor; and
the present value of the unguaranteed expected residual value of the underlying
asset.
.48 Present value is calculated using the rate implicit in the lease. The rate implicit in the
lease is the same as that under current leasing guidance in ASC 840 except that deferred
initial direct costs will be factored into the determination. The net investment is not
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remeasured after the commencement date unless the lease is modified and the
modification is not accounted for as a separate lease.
.49 Subsequent to lease commencement, interest income is recorded based on the
effective rate of interest on the carrying value of the net investment in the lease. The net
investment is subject to impairment testing based on the guidance applicable to
receivables under ASC 310-10-35-16 through 35-30.
.50 If collectibility of the lease payments, plus any amount necessary to satisfy a residual
value guarantee provided by the lessee, is not probable at the commencement date, the
lessor should not derecognize the underlying asset, but should recognize lease payments
received (including variable lease payments) as a deposit liability. The lessor should
continue to assess collectibility. Once collectibility becomes probable, the lessor should
derecognize the underlying asset and the deposit liability, recognize a net investment in
the lease based on the remaining lease payments and remaining lease term using the
commencement date rate implicit in the lease, and recognize selling profit or selling loss
(calculated as lease receivable, plus deposit liability, minus the underlying asset net of
the unguaranteed residual).
.51 If before the collectibility becomes probable (a) the contract is terminated, and the
lease payments received from the lessee are nonrefundable, or (b) the lessor repossesses
the underlying asset with no further obligation to the lessee and the lease payments
received from the lessee are nonrefundable, the lessor should derecognize the deposit
liability with the corresponding amount recognized as lease income.
.52 If collectibility is probable at the lease commencement date for a sales-type lease or
direct financing lease, then a lessor should not reassess whether collectibility is probable.
Subsequent changes in lessee’s credit risk should be accounted for in accordance with the
impairment guidance applicable to the net investment in the lease.
Direct financing lease
.53 Accounting for a direct financing lease is the same as that for a sales-type lease,
except that any selling profit (expected to be infrequent) and initial direct costs are
deferred and included in the net investment in the lease at lease commencement.
Operating lease
.54 In an operating lease, the leased asset remains on the lessor’s balance sheet. Initial
direct costs are deferred. Following the commencement date, the lessor will recognize
lease payments as income in the income statement over the lease term, generally on a
straight-line basis. Initial direct costs are recognized as an expense over the lease term on
the same basis as lease income (generally on a straight line basis). Variable lease
payments are recognized as income when earned.
.55 If collectibility of the lease payments plus any amounts necessary to satisfy a residual
value guarantee (provided by lessee or a third party) is not probable at the
commencement date, lease income is limited to the lesser of the income that would be
recognized as discussed in paragraph .54 or the lease payments (including variable lease
payments) that have been collected from the lessee. If the assessment of collectibility of
the lease payments changes after the commencement date, any difference between the
lease income that would have been recognized in accordance with paragraph .54 and the
lease payments (including variable lease payments) that have been collected from the
lessee should be recognized in income at that time.
.56 Similar to a lessee, a lessor may determine a single discount rate to apply to a
portfolio of leases assuming its application does not create a material difference when
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compared to individually determined discount rates applied to each of the leases in the
portfolio.
Lease term
.57 A lessor and a lessee determine the lease term based on the noncancellable period for
which a lessee has the right to use an underlying asset. Periods subject to lessee renewal
or termination options would not be included in the lease term unless economic factors
indicate that continuation of the lease appears to be reasonably certain at lease
commencement. The lease term includes periods covered by renewal or early termination
options if their exercise is controlled by the lessor.
Lease payments
.58 Lease payments consist of the following payments relating to the use of the
underlying asset during the lease term: (1) fixed payments, including in-substance fixed
payments, less any lease incentives paid or payable to lessee; (2) variable lease payments
that depend on an index or a rate based on the rate at inception; (3) the exercise price of
an option to purchase the underlying asset if the lessee is reasonably certain to exercise
that option; (4) payments for penalties for terminating the lease, if the lease term reflects
the lessee exercising an option to terminate the lease; (5) fees paid by the lessee to the
owners of a special-purpose entity for structuring the transaction; (6) for a lessee only,
amounts probable of being owed by the lessee under residual value guarantees.
Variable lease payments
.59 Some lease payments vary after the lease commencement date for reasons other than
the passage of time. Variability can be due to changes in an external market rate, such as
a benchmark interest rate or an index such as CPI. Variability may also be linked to the
use of the underlying asset (e.g., payments based on excess mileage in an automobile
lease) or performance of the underlying asset (e.g., percentage of sales in a retail store
lease).
.60 Variable lease payments that depend on an index or a rate should be included in
lease payments based on the index or rate at lease commencement; no increase or
decrease to future lease payments during the lease term should be assumed. Variable
lease payments other than those that depend on an index or a rate should not be a factor
in classifying or measuring the lease unless they are in-substance fixed payments.
In-substance fixed payments
.61 In-substance fixed payments are lease payments that are in form variable but in
substance lack genuine variability. Such payments should be treated like fixed lease
payments.
Lease incentives
.62 Lease incentives include payments made to or on behalf of the lessee, as well as
losses incurred by the lessor as a result of assuming a lessee’s preexisting lease with a
third party. For example, a lessor may make an up-front cash payment to induce a lessee
to sign the lease. These payments should be reflected as a reduction to lease payments
used to classify and measure the lease.
Renewal, purchase, and termination option payments
.63 Payments associated with renewal or termination options or the exercise of a
purchase option should be included in lease payments if it is reasonably certain that the
lessee will exercise such options.
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Residual value guarantee
.64 A residual value guarantee is a commitment to compensate the lessor for a shortfall
in the value of the underlying asset at the end of the lease term. A lessee-provided
residual value guarantee will include the amounts probable of being owed at the end of
the lease term as a lease payment when measuring the right-of-use asset and lease
liability. A lessor will include not only lessee-provided guarantees, but also those of third
parties in the measurement of its lease receivable. For lease classification purposes, the
full amount of the lessee’s residual value guarantee is used. If residual value guarantees
are provided for a portfolio of underlying assets, they are not considered for lease
classification purposes since the lessor cannot determine the amount of the residual
value guarantee applicable to an individual asset within the portfolio.
.65 Initial direct costs are incremental costs that would not have been incurred without
entering into the lease. Initial direct costs can include commissions or payments made to
existing tenants to incentivize the tenant to terminate its lease. Costs that are not
incremental (such as lessee payroll costs that would have been incurred regardless of the
lease) or costs that are incremental but that would have been incurred regardless of
whether or not the parties execute the lease (such as external legal costs to negotiate a
lease) are excluded.
Lease modification
.66 A lessee and lessor may renegotiate the terms of a contract for a variety of reasons. A
modification is a change to the contractual terms and conditions of a contract that results
in a change in the scope of or the consideration for the lease. Initial direct costs, lease
incentives, and any other payments made in connection with a modification are
accounted for similar to the accounting for a new lease.
Modification is a separate contract
.67 When a modification provides the lessee with an additional right of use not included
in the original lease (such as the right to use an additional asset) and the lease payments
increase commensurate with the standalone price for the additional right of use adjusted
for the circumstances of the particular contract, the modification is accounted for
separate from the original lease. In this case, the accounting for the original lease is not
changed and the new lease is accounted for as any other new lease.
Modification is a not separate contract
Lessee
.68 When a modification is not a separate contract, the lessee needs to reassess the
classification of the lease and remeasure the lease liability after remeasuring and
reallocating the consideration in the contract as of the effective date of the modification.
Assumptions used, including the discount rate, fair value, and remaining economic life of
the underlying asset are updated as of the modification effective date.
.69 If the modification grants additional rights to the lessee or extends or reduces the
term of the existing lease (other than exercise of a contractual option to extend or
terminate the lease) or changes contract consideration, the amount of the
remeasurement of the liability is recorded with a corresponding adjustment to the rightof-use asset.
.70 For a modification that fully or partially terminates an existing lease, the lessee will
be required to decrease the carrying amount of the right-of-use asset proportionate to the
impact the full or partial termination of the existing lease has on the lease liability. Any
difference between the reduction of the lease liability and the proportionate reduction in
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the right-of-use asset would be recognized as a gain or loss at the effective date of the
modification.
.71 If a finance lease is modified and the modified lease is classified as an operating
lease, any difference between (a) the carrying amount of the right-of-use asset as
adjusted per paragraphs .69 and .70, and (b) the carrying amount of the right-of-use
asset that would result from applying the operating lease right-of-use asset measurement
guidance to the modified lease is accounted for as a rent prepayment or a lease incentive.
Lessor
.72 When a modification is not a separate contract, the lessor will be required to reassess
the lease classification as of the effective date of the modification based on circumstances
on that date and account for the modified lease prospectively as follows:



The modification of an operating lease is accounted for as if it were a termination
of the existing lease and creation of a new lease that commences on the
modification effective date.
o
If the modified lease is classified as an operating lease, any prepaid or
accrued lease rentals relating to the original lease (e.g., from the straight
lining of rent payments) are added (if prepaid) or subtracted (if accrued) to
the sum of the modified lease payments for purposes of calculating the
straight-line rental income under the modified lease.
o
If the modified lease is classified as a direct financing or a sales-type lease,
the lessor is required to derecognize any deferred rent liability or accrued
rent asset and adjust the selling profit or loss accordingly.
The modification of a direct financing lease is accounted for as follows:
o
If the modified lease is classified as a direct financing lease, the discount
rate for the modified lease is recalculated so that the initial net investment
in the modified lease equals the carrying amount of the net investment in
the original lease immediately before the modification effective date.
o
If the modified lease is classified as a sales-type lease, then guidance
applicable to a sales-type lease applies with the commencement date of the
modified lease considered as the effective date. Selling profit or loss is
calculated based on the underlying asset’s fair value at the modification
effective date and the carrying amount of the net investment in the original
lease immediately before the modification effective date.
o
If the modified lease is classified as an operating lease, the underlying
asset is recognized at a carrying amount that equals the net investment in
the original lease immediately before the effective date of the modification.
Modification of a sales-type lease is accounted for as follows:
o
If the modified lease is classified as a sales-type or a direct financing lease,
the discount rate for the modified lease is adjusted so that the initial net
investment in the modified lease equals the carrying amount of the net
investment in the original lease immediately before the effective date of the
modification.
o
If the modified lease is classified as an operating lease, the underlying
asset is recognized at a carrying amount that equals the net investment in
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the original lease immediately prior to the effective date of the
modification.
Reassessment
.73 Even when a lease is not modified, there are circumstances when a lessee will be
required to remeasure lease payments. Remeasurement of lease payments requires a
remeasurement of the lease liability.
.74 When remeasuring the lease liability, the lessee is required to use an updated
discount rate, except in specified circumstances.
.75 The remeasurement to the lease liability results in an adjustment to the right-of-use
asset. If the carrying amount of the right-of-use asset is reduced to zero, any remaining
adjustment is recorded in the income statement.
Lease term and purchase options
.76 A lessee is required to reassess the lease term or its option to purchase the
underlying asset if (1) a significant event or a change in circumstances that is within the
lessee’s control occurs; or (2) an event written in the contract obliges the lessee to
exercise (or not exercise) an extension or termination option; or (3) the lessee elects to
exercise an option that was previously not reasonably certain of exercise or does not
exercise an option that was previously reasonably certain of exercise. When the lease
term changes, the lessee must remeasure the lease payments and reassess the lease
classification as discussed in paragraphs .73 through .75.
.77 A change in market-based factors, such as market rates relative to renewal or
purchase options, should not, in isolation, trigger reassessment. However, events and
circumstances that may trigger reassessment include (1) constructing significant
leasehold improvements that are expected to have significant economic value for the
lessee when the option becomes exercisable; (2) making significant modifications or
customizations to the underlying asset; (3) making a business decision that is directly
relevant to the lessee’s ability to exercise or not to exercise an option (for example,
extending the lease of a complementary asset or disposing of an alternative asset); (4)
subleasing the underlying asset for a period beyond the exercise date of the option.
.78 A lessor should not reassess the lease term or a lessee option to purchase the asset
unless the lease is modified and that modification is not accounted for as a separate
lease. When a lessee exercises an option to extend or terminate the lease or purchase the
underlying asset, the lessor should account for the option exercise as a contract
modification.
Variable rent, residual value guarantee
.79 A lessee should remeasure variable lease payments that depend on an index or a rate
when the lessee is otherwise required to remeasures the lease. Such remeasurement will
be based on the index or the rate as of the remeasurement date. All subsequent changes
to variable payments based on a rate or index are expensed in the period incurred absent
a new requirement to remeasure.
.80 A lessee should remeasure lease payments if a contingency associated with a variable
lease payment is subsequently resolved such that the variable lease payment now meets
the definition of a lease payment.
.81 A lessee should, on an ongoing basis, reassess if there is a change in the amounts
expected to be payable under residual value guarantees and remeasure the lease
payments to reflect the change.
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.82 A lessor should not remeasure lease payments unless the lease is modified and the
modification is not accounted for as a separate contract.
Contract combinations
.83 An entity may enter into multiple contracts in contemplation of each other such that
the substance is that of a single arrangement that achieves an overall commercial effect.
When contracts are entered into at or near the same time with the same counterparty (or
its related parties) and at least one of the contracts is or contains a lease, then the
contracts should be considered as a single transaction if (1) the contracts are negotiated
as a package with the same commercial objective(s); or (2) the amount of consideration
to be paid in one contract depends on the price or performance of the other contract; or
(3) the rights to use underlying assets conveyed in the contracts (or some of the rights of
use conveyed in the contracts) are a single lease component.
Subleases
.84 When a lessee subleases an asset, then the lessee (now a sub-lessor) should account
for a head lease and sublease as two separate contracts (unless those contracts meet the
contract combinations guidance). The sub-lessor should determine the classification of
the sublease based on the underlying asset in the head lease, rather than on the sublessor’s right-of-use. The accounting by the sub-lessor is based on whether or not the
sub-lessor is relieved of primary obligation under the head lease and the classification of
both the head lease and the sublease.
Related-party leases
.85 The recognition and measurement requirements for related-party leases are based on
their legally enforceable terms and conditions. This is the case even when related-party
transactions are not documented and/or the terms and conditions are not at arm’s
length. Lessors and lessees should disclose lease transactions with related parties in
accordance with the related party guidance in ASC 850, Related Party Disclosures.
Sale and leaseback transactions
.86 Existing sale and leaseback guidance, including the detailed guidance applicable for
sale-leasebacks of real estate, is replaced with a new model applicable to all assets, which
will apply equally to both lessees and lessors. A sale-leaseback transaction will qualify as
a sale only if all the following conditions are met.

The transaction meets the sale guidance in the new revenue recognition standard.

The leaseback is not a finance or a sales-type lease.

If there is a repurchase option, (a) the exercise price is at the asset’s fair value at
the time of exercise, and (b) alternative assets that are substantially the same as the
transferred asset are readily available in the marketplace.
.87 If the transaction is a sale, the seller-lessee will recognize the sale based on the new
revenue recognition standard when control transfers to the buyer-lessor, derecognizing
the asset sold and replacing it with a right-to-use asset and lease liability for the
leaseback. When the arrangement is a sale, the buyer-lessor will account for its purchase
of the asset and classify the lease based on the lessor guidance. A seller-lessee and buyerlessor should determine if the sale-leaseback transaction is at fair value based on the
difference between either (a) the sale price and fair value of the asset, or (b) the present
value of lease payments and market rents, whichever is more readily determinable.
In depth 13
.88 If the sale-leaseback transaction is not at fair value, the seller-lessee and the buyerlessor should adjust the sale price of the asset on the same basis used to determine that
the transaction was not at fair value. An increase to the sale price of the asset is
accounted for as a prepayment of rent and a reduction of the sale price of the asset as
additional financing provided by the buyer-lessor to the seller-lessee.
.89 If the transaction fails sale treatment, the buyer-lessor will reflect the sale-leaseback
transaction as a lending. The seller-lessee will not derecognize the transferred asset and
will reflect the sale-leaseback transaction as a borrowing.
Build-to-suit transactions
.90 Build-to-suit guidance under the current leasing rules is replaced with a new model
under which a lessee is the deemed owner of an asset under construction if the lessee
controls such asset during the construction period. A lessee may control the asset under
construction in many ways. The following list from ASC 842-40-55 enumerates
examples of circumstances when the lessee controls an underlying asset that is under
construction. The list is not all inclusive.
a.
The lessee has the right to obtain the partially constructed underlying asset at any
point during the construction period (for example, by making a payment to the
lessor).
b. The lessor has an enforceable right to payment for its performance to date, and the
asset does not have an alternative use (see paragraph 84210-55-7) to the ownerlessor. In evaluating whether the asset has an alternative use to the owner-lessor,
an entity should consider the characteristics of the asset that will ultimately be
leased.
c.
The lessee legally owns either:
1.
Both the land and the property improvements (for example, a building)
that are under construction
2. The non-real-estate asset (for example, a ship or an airplane) that is under
construction.
d. The lessee controls the land that property improvements will be constructed upon
(this includes where the lessee enters into a transaction to transfer the land to the
lessor, but the transfer does not qualify as a sale in accordance with paragraphs
842-40-25-1 through 25-3) and does not enter into a lease of the land before the
beginning of construction that, together with renewal options, permits the lessor or
another unrelated third party to lease the land for substantially all of the economic
life of the property improvements.
e.
The lessee is leasing the land that property improvements will be constructed
upon, the term of which, together with lessee renewal options, is for substantially
all of the economic life of the property improvements, and does not enter into a
sublease of the land before the beginning of construction that, together with
renewal options, permits the lessor or another unrelated third party to sublease the
land for substantially all of the economic life of the property improvements.
.91 If the lessee controls the asset under construction during the construction period,
the lessee and the lessor would be subject to the sale and leaseback model. If the
requirements under the sale and leaseback model are not met, the transaction would be
accounted for as a financing by the lessee and lessor.
In depth 14
.92 Any payments made by the lessee during the construction period would be
accounted for based upon the purpose of those payments. Payments made for the right
to use the underlying asset are lease payments irrespective of the timing and nature of
such payments. Construction costs incurred by the lessee, where the lessee is not
considered the owner of the asset under construction, are considered lease payments
unless there is a good or service being provided to the lessee. In the latter case, the
payments should be accounted for under other guidance, such as ASC 330, Inventory, or
ASC 360, Property, Plant, and Equipment.
Disclosures
.93 Extensive quantitative and qualitative disclosures, including disclosures about
significant judgments made by management, will be required to provide greater insight
into both the revenue and expense recognized and expected to be recognized from
existing contracts. The level of detail to be disclosed and aggregation or disaggregation of
disclosures should satisfy the disclosure objective of enabling users of financial
statements to assess the amount, timing, and uncertainty of cash flows arising from
leases.
.94 Lessees and lessors, for example, will be required to disclose a general description of
leases, the basis on which variable rents are determined, a description of extension and
termination options, significant judgments and assumptions made (e.g., with respect to
embedded leases and the allocation of consideration between lease and nonlease
components), and lease transactions between related parties.
Observations on significant differences with existing guidance
95. The following table summarizes the significant differences between the new and the
current lease accounting standard.
Topic
New Guidance
Observations
Definition of a
lease
An arrangement
contains a lease only
when such arrangement
conveys the right to
“control” the use of an
“identified asset.”
Under existing guidance, an arrangement
can contain a lease even without control
of the use of the asset if the customer
takes substantially all of the output over
the term of the arrangement.
Ownership during
construction period
based on a control
model as described in
paragraph .90.
Current guidance is based on a risks and
rewards model, but contains several
complex prescriptive provisions designed
to assess lessee ownership during
construction. The new model has
eliminated these prescriptive rules and
replaced them with a model based on
control.
Build-to-suit
arrangements
Determining whether an arrangement
contains a lease is likely to be more
important since virtually all leases will
require recognition of an asset and
liability. It will also make the allocation of
contractual consideration between lease
and nonlease components a critical
element of the accounting analysis for
many companies.
In depth 15
Topic
New Guidance
Observations
Lease
classification
Lessees: There are no
bright lines and there is
one additional criterion
regarding the specialized
nature of the underlying
asset for lease
classification.
Lessees: The lack of explicit bright lines
will increase the level of judgment
required when classifying a lease –
particularly for certain highly structured
transactions. Despite the removal of the
bright lines, the basis for conclusions
acknowledges that one reasonable
approach to determining whether the
lease is for a major portion of the assets
life and whether payments represent
substantially all of the assets value is the
75% and 90% thresholds applicable in
today’s guidance.
Lessors: Criteria are
similar to that for
lessees, with an
additional requirement
to assess collectibility to
support classification as
a direct financing lease.
Also, in order to
derecognize the asset
and record revenue,
collection of payments
due must be probable
for sales-type leases.
Lessors: Under the current “risks and
reward” model, in addition to a
collectibility criterion, there is a
“reimbursable costs” criterion for salestype and direct financing lease
classification. In addition, to achieve
sales-type lease accounting for real estate,
title must automatically transfer to the
lessee by the end of the lease term. Both
of these conditions have been removed
from the new guidance.
Under the current model, the difference
between a sales-type lease and a direct
finance lease is the presence of upfront
profit. When present, the arrangement is
a sales-type lease.
Under the new standard, the key
distinction is based on control. As a
practical matter, this will likely depend on
whether the “substantially all” 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.
Balance sheet
presentation
Lessees: Lessees will
recognize a right-of-use
asset and a lease liability
for virtually all leases.
Lessees: Putting nearly all leases on the
balance sheet is the biggest change, and
one of the key objectives of the project.
Lessors: Leveraged
lease accounting will not
be permitted for new
transactions or existing
transactions modified
on or after the effective
date.
Lessors: The lessor model has been
carried forward substantially unchanged.
Netting of non-recourse debt previously
permitted under the leveraged lease
model will no longer be available.
In depth 16
Topic
New Guidance
Observations
Income and
expense
recognition
Lessees: Expense will
be recognized on a
straight-line basis for an
operating lease. This is
accomplished by
increasing the
amortization of the
right-of-use asset as
interest expense on the
liability declines over
the lease term.
Recognition of expense
for a finance lease will
be similar to capital
leases today.
Lessees: Under current guidance,
operating leases are off-balance sheet.
With the new balance sheet recognition,
the right-of-use asset will now be subject
to impairment testing. Further, the
mechanics of achieving a straight-line
expense for operating leases will backload
amortization of the right-of-use asset,
potentially increasing the risk of an
impairment.
Lessors: To recognize
upfront revenue and
profit in a sales-type
lease, the lessee will
need to obtain control
over the leased asset.
Lessors: The shift from a “risks and
rewards” model under the current
guidance to a “control” model under the
new guidance for sales-type leases may
have commercial implications for certain
transactions (e.g., sale and leaseback
transactions).
Inception date
versus
commencement
date
Under the new
guidance, the
determination of
whether or not a
contract is a lease or
contains a lease is done
at the inception date.
Lease classification,
recognition, and
measurement are
determined at the lease
commencement date.
Under ASC 840, assumptions relevant to
classification and measurement are
determined at lease inception.
Recognition of rent expense or capital
lease assets and liabilities begin at the
commencement date.
Reassessment lessee
A lessee is required to
reassess the lease term if
a triggering event occurs
that is under the lessee’s
control or an option is
exercised/not exercised
as planned. A change to
the lease term will lead
to reclassification of the
lease and
remeasurement of the
right-of-use asset and
liability. Assumptions
such as the discount rate
and variable rents based
on a rate or index will be
updated as of the
remeasurement date.
Current guidance does not require a
reassessment unless the lease is modified
or an option is exercised. Under the new
guidance, a lessee will need to monitor for
triggering events on an ongoing basis.
In depth 17
Topic
New Guidance
Observations
Modification
A lease modification is a
change to the
contractual terms and
conditions of a lease that
was not part of the
original lease and which
results in a change in
scope or consideration.
A modification that
grants the lessee an
additional right of use
priced at market is a
separate lease that is
then classified at the
lease modification date.
The current guidance for lease
modification can be very complex and it
can be difficult to differentiate between a
termination and modification of a lease
contract. A renewal or extension is
considered a new lease. All other changes
are subject to a two-step evaluation of the
lease.
Initial direct
costs
Under the new
guidance, initial direct
costs are defined as
incremental costs of a
lease that would not
have been incurred if the
lease had not been
obtained.
Under current guidance, incremental
direct costs can include internal costs as
well as external costs such as legal fees,
even when the lease has not been
obtained. Certain incremental costs
previously eligible for capitalization will
be expensed.
Sale-leaseback
transactions
Under the new standard,
a sale-leaseback
transaction will qualify
as a sale only if (1) it
meets the sale guidance
in the new revenue
recognition standard,
(2) the leaseback is not a
finance lease, and (3) if
there is a repurchase
option, (a) the
repurchase price is at
the asset’s fair value at
the time of exercise and
(b) alternative assets
that are substantially the
same as the transferred
asset are readily
available in the
marketplace.
Under the current guidance, saleleaseback accounting is applicable only to
lessees. This includes the detailed and
specialized guidance applicable to saleleasebacks involving real estate.
Under the new standard, sale-leaseback
accounting will apply to lessees and
lessors. There will be no specialized
guidance for sale-leasebacks of real estate.
A “failed” sale is treated as a financing by
both the lessee and lessor (i.e., the seller
has not sold the asset but has essentially
mortgaged it).
Sale-leaseback transactions involving
equipment frequently have fixed price
repurchase options – often at the request
of the seller-lessee for commercial
reasons. Such transactions will not qualify
as a sale under the new standard.
However, sale-leaseback accounting
applied for transactions executed prior to
the effective date will not need to be reevaluated. Existing “failed” sales will be
evaluated under the new standard and
may qualify for sale-leaseback accounting
on transition.
In depth 18
Topic
New Guidance
Observations
Lease versus
nonlease
components
A contract may contain
lease and nonlease
components. Under the
new standard,
components include
only those items or
activities that transfer a
good or service to the
lessee. The right to use
land is considered a
separate lease
component unless the
accounting effect of
doing so would be
immaterial.
Under current guidance, property taxes
and insurance are subject to lease
accounting guidance, but are considered
executory costs rather than minimum
lease payments. Under the new standard,
property taxes and insurance are not
considered as components of a contract as
they are not for a service provided by the
lessor to the lessee and are therefore a
part of lease payments.
Under existing guidance, land is
separately classified when the fair value of
the land is 25% or more of the combined
fair value of the land and building.
A lessee may choose not
to separate nonlease
components 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.
What’s next
.96 Public business entities are required to adopt the new leasing standard for fiscal
years, and interim periods within those fiscal years, beginning after December 15, 2018.
For calendar year-end public companies, this means an adoption date of January 1, 2019.
.97 Nonpublic companies (i.e., those not meeting FASB’s definition of a public business
entity) are required to apply the new leasing standard for fiscal years beginning after
December 15, 2019, and interim periods within fiscal years beginning after December 15,
2020. For nonpublic calendar year-end companies, this means an adoption date of
January 1, 2020.
.98 Early adoption of the new leasing standard is permitted upon issuance (February 25,
2016).
.99 The new leasing standard requires modified retrospective transition, which requires
application of the new guidance at the beginning of the earliest comparative period
presented in the year of adoption.
.100 For calendar year public business entities, this means retrospective application to
previously issued annual and interim financial statements for 2018 and 2017.
.101 For calendar year nonpublic companies, this means retrospective application to
previously issued annual financial statements for 2018 if comparative statements for two
preceding years are presented.
In depth 19
.102 An entity can elect the following package of practical expedients for all leases that
commenced before the effective date:

An entity need not reassess whether any expired or existing contracts are or
contain embedded leases.

An entity need not reassess the lease classification for any expired or existing leases
(i.e., all existing leases that were classified as operating leases or capital leases
under current leasing guidance will be classified as operating leases and finance
leases, respectively, under the new leasing guidance).

An entity need not reassess initial direct costs for any existing leases.
.103 An entity can also elect a practical expedient to use hindsight in determining the
lease term when considering lessee options to extend or terminate the lease and to
purchase the underlying asset as well as in assessing the impairment of right-of-use
assets. This practical expedient can be elected separately or in conjunction with the
package of practical expedients above and must be applied consistently to all leases.
.104 Lessors should continue to account for leveraged leases existing at the application
date of the leasing standard using the current lease guidance under ASC 840.
Next steps
.105 Beyond the financial reporting impact, the new guidance is likely to require changes
to lease systems and related controls. Based on the effective date and the need for
retrospective application to prior years, lessees should focus on their ability to gather the
required data on existing leases and capture data on new leases, which will be critical to
an effective transition. In some cases, new systems, controls, and processes may be
warranted, which will take additional time to obtain, develop, implement, and test.
.106 With the issuance of the standard in February 2016, companies will have only three
years before they begin reporting under the new guidance. Companies that have not done
so already, will want to think through the potential impact, particularly in light of the
requirement to retrospectively apply the standard to previously issued financial
statements. If they have not done so already, preparers should begin to develop a plan for
an orderly and smooth transition.
Questions?
Authored by:
PwC clients who have questions about this
In depth should contact their engagement
partner. Engagement teams who have
questions should contact the Financial
Instruments team in the National
Professional Services Group (1-973-2367803).
John Bishop
Partner
Phone: 1-973-236-4420
Email: [email protected]
Chad Soares
Partner
Phone: 1-973-236-4569
Ashima Jain
Managing Director
Phone: 1-408-817-5008
© 2016 PricewaterhouseCoopers LLP, a Delaware limited liability partnership. All rights reserved. PwC refers to the United States member firm, and may sometimes refer to the
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resource for financial executives.
No. US2016-02 (supplement)
May 26, 2016
What’s inside:
Overview ..........................1
Lessee accounting
model ............................ 3
Lease modification
(lessee) .......................... 5
Lease reassessment ........ 8
Embedded leases ............. 8
Components, contract
consideration, and
allocation ..................... 11
Sale-leaseback
arrangements............. 12
Build-to-suit
arrangements............. 13
The leasing standard
A comprehensive look at the new model and its
impact
Retail and consumer industry supplement
At a glance
Earlier this year, the FASB issued its long-awaited and much-anticipated
standard on leasing. Under the new guidance, lessees will be required to bring
substantially all leases onto their balance sheets. This and other provisions will
likely introduce some level of change for all entities that are party to a lease.
In depth US2016-02 provides an analysis of the new standard. This supplement
highlights some of the areas that could create the most significant challenges for
entities in the retail and consumer sectors as they transition to the new standard.
In addition, PwC’s accounting guide, Leases – 2016 edition, was released in April
2016 and contains a comprehensive overview of the new leasing standard and its
related impacts.
Overview
Entities in the retail and consumer sectors are generally prolific lessees and, at
times, lessors of assets. Lease accounting literature and related interpretations
under US GAAP has sometimes presented challenges for lessees, and can result in
different financial reporting outcomes for economically similar transactions based
solely on the nuanced terms of particular leasing transactions. The FASB’s new
standard, Leases (ASC 842), represents the first comprehensive overhaul of lease
accounting since FAS 13 was issued in 1976. The FASB’s objectives for the new
standard were increased transparency and comparability across organizations.
ASC 842 requires lessees to capitalize all leases with a term of more than one year.
A lessee’s income statement recognition of lease-related expense will depend on the
lease’s classification as either an operating or financing lease. This classification
will be based on criteria that are largely similar to today’s classification criteria for
operating versus capital leases, but (a) without explicitly stated bright lines and (b)
with an additional criterion related to the specialized nature of the leased asset and
whether it is expected to have an alternative use to the lessor at the end of the lease
term.
In depth 1
For income statement purposes, a lessee in an operating lease will continue to
record straight-line lease expense. Finance leases will result in a front-loaded
expense pattern (similar to today’s capital leases). Although the pattern of expense
recognition may be similar to today’s accounting, the amount of lease expense
recorded will likely differ due to changes in how certain elements of rent payments
are treated.
The accounting model for lessors is substantially equivalent to existing US GAAP.
Lessors will classify leases as operating, direct financing, or sales-type based on
criteria similar to that used by lessees, plus an additional requirement to assess
collectibility of lease payments.
Effective date and transition
The new standard is effective for public business entities for fiscal years, and
interim periods within those fiscal years, beginning after December 15, 2018. For
calendar year-end public companies, this means an adoption date of January 1,
2019.
For other companies (i.e., those not meeting the FASB’s definition of a public
business entity), the new standard is effective for fiscal years beginning after
December 15, 2019, and interim periods within fiscal years beginning after
December 15, 2020.
Early adoption is permitted for all entities. The new standard is required to be
adopted using a modified retrospective approach, which means application of the
new guidance at the beginning of the earliest comparative period presented in the
year of adoption. For calendar year-end public business entities adopting the
standard on January 1, 2019, this means retrospective application to annual and
interim financial statements for 2018 and 2017. For calendar year-end companies
other than public business entities adopting the standard on January 1, 2020, this
means retrospective application to previously issued annual financial statements
for 2018 and 2019 if comparative statements for two preceding years are presented.
To reduce some of the burden of adoption, there are certain practical expedients,
some of which are required to be adopted together.
Impact
The accounting changes are just the tip of the iceberg in terms of the impact this
new standard will have on retailers and consumer companies. Companies will need
to analyze how the new model will affect current business activities, contract
negotiations, budgeting, key metrics, systems & data requirements, and business
processes and controls.
For retail and consumer companies with a significant portfolio of leases, the ability
to gather the required information on existing leases and capture data on new
leases at the outset will be critical to an orderly and smooth transition to the new
standard. This may result in the need for new systems, controls, and processes,
which will take time to identify, design, implement, and test. Furthermore,
recognition of right-of-use assets and associated liabilities will profoundly change
the balance sheet for retail and consumer companies. This in turn may affect loan
covenants, credit ratings, and other external measures of financial performance.
In depth 2
Lessee accounting model
Lessees will be required to recognize a right-of-use asset and liability for virtually all leases (other than short-term
leases). For income statement purposes, the FASB retained a dual model, requiring leases to be classified as either
operating or finance leases. Operating leases will typically result in straight-line expense (similar to current
operating leases) while finance leases will result in a front-loaded expense pattern (similar to current capital
leases). Classification will be based on criteria that are largely similar to those in current lease accounting
guidance, but (a) without explicitly stated bright lines and (b) with an additional explicit criterion related to the
specialized nature of the leased asset and whether it is expected to have an alternative use to the lessor at the end
of the lease term.
When retail and consumer companies have excess space, very often they sublease the excess space. When a lessee
subleases an asset, the lessee (now a sub-lessor) should account for a head lease and sublease as two separate
contracts unless the sub-lessor is relieved of its primary obligation under the head lease. The sub-lessor should
determine the classification of the sublease based on the underlying asset in the head lease, rather than on the
sub-lessor’s right-of-use.
PwC observation:
Classification guidance includes an explicit requirement to treat a lease as a finance lease if the asset is so
specialized that there is no alternative use to the lessor at the end of the lease term. We do not expect that this
new criterion will have a significant impact on lease classification for most retail and consumer companies.
This is because, in such cases, the lessor would likely have either (a) priced the lease such that the present
value of lease payments is substantially all of the fair value of the asset or (b) set the lease term to be equal to a
major part of the asset’s remaining economic life, causing the lease to be classified as financing (capital)
already.
Example 1 – Lease classification, initial and subsequent measurement
Facts: Retailer Corp enters into a lease of a head office building with Lessor Corp. The following is a summary of
information about the lease and the leased building.
Lease term
5 years with no renewal option
Remaining economic life of the building
40 years
Purchase option
None
Annual lease payments
$1,100,000
Payment date
Annually in advance on January 1
Fair value of the building
$50,000,000
Retailer Corp’s incremental borrowing rate
5%
Other information:

The rate implicit in the lease that Lessor Corp charges Retailer Corp is not readily determinable by Retailer
Corp

Title to the building remains with Lessor Corp throughout the period of the lease and upon lease expiration

Retailer Corp does not guarantee the residual value of the building

Retailer Corp pays for all property taxes, insurance, and maintenance of the building separate from lease
payments (i.e., a triple net lease)

Lessor Corp reimburses Retailer Corp $100,000 at the lease commencement date for moving expenses as a
lease incentive

The lease commencement date does not fall at or near the end of the economic life of the building
In depth 3
Question 1: How should Retailer Corp classify this lease?
Discussion: Retailer Corp would assess the arrangement using the classification criteria as follows:

The lease does not transfer ownership of the building to Retailer Corp by the end of the lease term.

The lease does not grant the lessee an option to purchase the building.

Retailer Corp would utilize the building for approximately 13% of its remaining economic life (5 year lease
/ 40 year remaining economic life). This is not considered a major portion of the remaining economic life.

As the rate implicit in the lease is not determinable by Retailer Corp, Retailer Corp uses its incremental
borrowing rate (5%) to calculate the present value of the lease payments. The present value of the
$1,100,000 annual lease payments (payable at the beginning of each year) less $100,000 lease incentive
paid by Lessor Corp at the lease commencement date is $4,900,545. This represents ~10% of the
$50,000,000 fair value of the building. This does not amount to substantially all of the fair value of the
building.

The underlying asset is an office building and is not of such a specialized nature that it is expected to have
no alternative use to the lessor at the end of the lease term.
Based on the above analysis, Retailer Corp classifies the lease as an operating lease.
Question 2: How should Retailer Corp measure and record this lease?
Discussion: Retailer Corp should measure the lease liability by calculating the present value of the unpaid annual
fixed lease payments of $1,100,000 discounted at Retailer Corp’s incremental borrowing rate of 5% ($5,000,545).
Since Retailer Corp received a $100,000 lease incentive at lease commencement, the right-of-use asset would be
equal to the lease liability, reduced by the $100,000 lease incentive received at lease commencement
($4,900,545).
Although not included in the example for simplicity, the right-of-use asset would be adjusted for any initial direct
costs incurred by Retailer Corp or lease payments made to Lessor Corp on or before the commencement date–
both of which would increase the right-of-use asset recognized by the lessee. Further, although a typical lease
would have a rent holiday at the beginning and include payments monthly or perhaps quarterly in advance, the
illustration has been simplified to reflect annual payments in advance.
Question 3: How should Retailer Corp subsequently measure the right-of-use asset and lease liability during the
lease term?
Discussion: Retailer Corp calculates the total lease cost equal to the $1,100,000 rent payment per year for five
years less the $100,000 lease incentive ($5,400,000). Retailer Corp then calculates the straight-line lease expense
to be recorded each period by dividing the total lease cost by the total number of periods. Retailer Corp calculates
the annual straight line expense to be $1,080,000.
Interest on the lease liability would be calculated using a rate of 5%, the same discount rate used to initially
measure the lease liability. The lease liability would be amortized as follows (assuming beginning of year
payments):
In depth 4
Payment
Principal
Interest
expense
Interest paid
Lease liability
Commencement
Year 1
$ 5,000,545
$
1,100,000*
$ 1,100,000
$
—*
$ 195,027
4,095,572
Year 2
1,100,000
904,973
195,027
149,779
3,145,351
Year 3
1,100,000
950,221
149,779
102,268
2,147,619
Year 4
1,100,000
997,732
102,268
52,381
1,100,000
Year 5
1,100,000
1,047,619
52,381
—
—
$ 5,500,000
$ 5,000,545
$ 499,455
$ 499,455
$
—
*Note: Initial payment was due day 1 of the lease; therefore the entire payment is a reduction of principal.
The last step is to calculate the amortization of the right-of-use asset as the difference between the straight-line
lease expense and interest on the lease liability. The following table shows this calculation.
Straight line
expense
(A)
Interest expense
on lease liability
(B)
Amortization
(A – B)
Commencement
Right-of-use asset
$ 4,900,545
Year 1
$ 1,080,000
$ 195,027
Year 2
1,080,000
Year 3
$
884,973
4,015,572
149,779
930,221
3,085,351
1,080,000
102,268
977,732
2,107,619
Year 4
1,080,000
52,381
1,027,619
1,080,000
Year 5
1,080,000
—
1,080,000
—
$ 5,400,000
$ 499,455
$ 4,900,545
$
—
Lease modification (lessee)
A lease modification is any change to the terms and conditions of a contract that results in a change in the scope
of, or the consideration for, use of an underlying asset. A modification is accounted for as a contract separate from
the original lease if the modification grants the lessee an additional right of use not included in the original lease
and the additional right of use is priced consistent with its standalone value. When a modification is a separate
lease, the accounting for the original lease is unchanged and the new lease component(s) should be accounted for
at commencement like any other new lease. In contrast, when a lease is modified, the lessee must remeasure and
reallocate all of the remaining contract consideration from both lease and nonlease components based on the
modified contract, reassess classification, and remeasure the lease liability and adjust the right-of-use asset using
assumptions as of the effective date of the modification (e.g., discount rate, fair value, and remaining economic
life). Any direct costs, lease incentives, or other payments by the lessee or lessor are accounted for by the lessee
similar to the accounting for those items in a new lease.
In depth 5
PwC observation:
Retail companies have large portfolios of leased assets that are subject to frequent renegotiations as a result of
changes in general macroeconomic conditions or company-specific factors (customer trends, store location,
etc.). As such, creating a process to identify and properly evaluate such changes will be a critical part of their
response to the new standard.
Example 1 – Accounting for an operating lease that is modified to change lease payments and
lease term
Facts: On January 1, 20X1, Retailer Corp enters into a contract with Lessor Corp to lease property that will be
used as a retail store. The lease has the following terms:
Lease commencement date
January 1, 20X1
Initial lease term
5 years
Annual lease payments
$100,000
Payment date
Annually in advance on January 1
$10,000
Retailer Corp’s incremental borrowing rate
5% (Retailer Corp does not know rate implicit in the lease)
Retailer Corp determines that the lease is an operating lease at lease commencement date.
On January 1, 20X4 (beginning of year 4 of the lease), Retailer Corp enters into negotiations with the lessor to
amend the original lease agreement. Lessor Corp agrees to extend the lease contract for an additional three years
and to reduce the remaining annual lease payments to $90,000 to reflect current market rates. The following
table summarizes pertinent information as of the lease modification date.
Modification date
January 1, 20X4
Modified annual lease payments (20X4 and 20x5)
$90,000
Retailer Corp’s incremental borrowing rate on the modification date
4%
Right-of-use asset immediately before the modification
$199,238
Lease liability immediately before the modification
$195,238
Retailer Corp determines that the lease modification should not be accounted for as a new lease because an
additional right of use was not granted and that the modified lease is still an operating lease.
How should Retailer Corp measure the lease liability and right-of-use asset for the lease modification?
Discussion: Retailer Corp should remeasure the lease liability as of the modification date, with the offsetting
adjustment recorded as part of the right-of-use asset balance.
In depth 6
Balance sheet impact
Retailer Corp should remeasure the lease liability on the date of the modification by calculating the present value
of the remaining future lease payments for the modified lease term using Retailer Corp’s current discount rate of
4%. The modified lease liability is $416,690 as shown in the table below.
Year 4
Lease payment
Year 6
Year 8
Year 9
Total
$90,000
$90,000
$90,000
$90,000
$90,000
$450,000
—
$3,462
$6,790
$9,990
$13,068
$33,310
$90,000
$86,538
$83,210
$80,010
$76,932
$416,690
Discount
Present value
Year 5
To calculate the adjustment to the lease liability, Retailer Corp should compare the recalculated lease liability
balance and the original lease liability balance on the modification date. The lease liability would be adjusted as
follows:
Revised lease liability
$ 416,690
Original lease liability
195,238
Increase in lease liability
$ 221,452
The right-of-use asset is adjusted as follows:
Original right-of-use asset
$199,238
Increase in lease liability
221,452
Revised right-of-use asset
$420,69o
Income statement impact
Retailer Corp will recalculate the straight line lease expense using the following formula:
Future undiscounted cash flows at the remeasurement date
Plus (the right-of-use asset less the lease liability immediately before the remeasurement)
Remaining lease term
In the above example, the amounts are as follows:
$450,000 + ($199,238 - $195,238) = $90,800 annual lease expense for the remaining term of the lease
5 years
In depth 7
Lease reassessment
There are circumstances when a lessee will also be required to assess and potentially remeasure the right-of-use
asset and lease liability subsequent to lease commencement even without a lease modification. The table below
lists these circumstances and the related impact on the lessee’s accounting.
Reallocate contract
consideration and
remeasure the lease
Reassess
classification
Update
discount rate
An event occurs which gives the lessee a
significant economic incentive to
exercise/not exercise a renewal option



An event occurs which gives the lessee a
significant economic incentive to
exercise/not exercise a purchase option



A contingency on which variable
payments are based is met such that
some or all the payments become fixed
lease payments

Amounts due under a residual value
guarantee become probable of being
owed

Lessors are not subject to these reassessment requirements.
PwC observation:
For a reassessment of the lease term or exercise of a purchase option, the triggering event must be within the
control of the lessee (if not, the event will not require a reassessment). A change in market-based factors will
not, in isolation, trigger a reassessment of the lease term or the exercise of a purchase option. For example, a
reassessment would not be triggered if a lessee is leasing retail space in a mall and current market conditions
for the mall location change such that lease payments that the lessee will be required to make in the extension
period are now considered above market or below market. On the other hand, a lessee constructing significant
long-lived leasehold improvements with significant value beyond the initial lease term would require a
reassessment to determine whether this improvement results in renewal being considered reasonably certain.
It will be important for companies to have processes and controls in place to identify and monitor triggering
events that would require the reassessment of a lease.
Embedded leases
An arrangement is a lease or will contain a lease if an underlying asset is explicitly or implicitly identified and use
of the asset is controlled by the customer.
An identified asset must be physically distinct. A physically distinct asset may be an entire asset or a portion of an
asset. For example, a building is generally considered physically distinct, but one floor within the building may
also be considered physically distinct if it can be used independent of the other floors (e.g., point of ingress or
egress, access to lavatories, etc.). Similarly, the use of a static or electronic billboard on the facade of a stadium
may be considered physically distinct from the use of the stadium as a whole if the location of the billboard is
specified as a condition of the contract.
In depth 8
A customer controls the use of the identified asset by possessing the right to (1) obtain substantially all of the
economic benefits from the use of such asset (“economics” criterion); and (2) direct the use of the identified asset
throughout the period of use (“power” criterion). A customer meets the “power” criterion if it holds the right to
make decisions that have the most significant impact on the economic benefits derived from the use of the asset. If
these decisions are pre-determined in the contract, the customer must have the right to direct the operations of
the asset without the supplier having the right to change those operating instructions throughout the period of use
for the contract to be a lease.
The new model differs in certain respects from today’s risks and rewards model and may result in the
identification of fewer embedded leases compared to current guidance. However, under current lessee guidance,
embedded leases are often off-balance-sheet operating leases and, as such, application of lease accounting may
not have had a material impact on the income statement. Determining whether to apply lease accounting to an
arrangement under the new guidance is likely to be far more important since virtually all leases will result in
recognition of a right-of-use asset and lease liability.
PwC observation:
There has been a trend in the retail and consumer sectors in recent years to formally outsource business
operations and support functions—in some cases on a global scale—to leverage and drive expertise. Retail and
consumer companies will need to assess their contractual arrangements to determine if they contain an
embedded lease. Common examples of arrangements that might contain an embedded lease are outsourced
warehousing operations, datacenter/hosting arrangements, exclusive supply arrangements, and “store-withina-store” arrangements.
Example 1 — Exclusive supply arrangement
Facts: CPG Corp contracts with Supplier Corp to purchase handbags for a five year period. CPG Corp worked
closely with Supplier Corp to design the handbag manufacturing production line and stipulate its specifications.
Supplier Corp has one manufacturing production line that it can use to fulfill the contract. CPG Corp specifies how
many handbags it needs and when it needs them to be available. Supplier Corp operates the machinery and makes
all operating decisions including how and when the handbags are to be produced, as long as it meets the
contractual requirements to deliver the specified number on the specified date.
Does the contract contain a lease of the manufacturing production line?
Discussion: No, the contract does not contain a lease. Since Supplier Corp only has one manufacturing production
line available to fulfil the contract, the asset is implicitly identified. However, CPG Corp does not direct the use of
the equipment that most significantly drives the economic benefits because Supplier Corp determines how and
when the equipment is operated during the period of use. Therefore, Supplier Corp has the right to control the use
of the identified asset during the period of use. Although CPG Corp stipulates the product to be provided and has
input into the initial decisions regarding the use of the asset through its involvement in the design of the
production line, it does not have decision-making rights over the asset during the period of use. This arrangement
is a supply agreement, not a lease.
Example 2 – Store-within-a-store (substantive substitution rights)
Facts: Retailer Corp owns a retail store where it sells consumer electronics products. Retailer Corp leases out
different portions of its retail floor space to other consumer electronics companies as part of its “store-within-astore” concept strategy. CPG Corp contracts with Retailer Corp to reserve 750 square feet of space to display and
sell its inventory for a three-year period. The contract specifies that CPG Corp’s inventory will be situated in an
identified location in the retail store. However, Retailer Corp has the legal right to shift CPG Corp’s inventory to
another location within its retail store at its discretion, subject to the requirement to provide 750 square feet of
display space for the three-year period.
In depth 9
Retailer Corp frequently reorganizes its space to display new vendor’s products to meet the needs of new contracts
or sales trends. The cost of reallocating space is low compared to the benefits of being able to shift display
locations to meet sales trends in the retail store.
Does the contract explicitly or implicitly identify an asset to be used to fulfill the contract?
Discussion: No. The asset (i.e., floor space) is not identified because Retailer Corp has a substantive substitution
right. Retailer Corp has agreed to provide a specific amount of display space within its store but has the unilateral
right to relocate CPG Corp’s inventory and can do so without significant cost. Therefore, the contract does not
have an identified asset and the arrangement does not contain a lease.
Example 3 – Store-within-a store (no substantive substitution rights)
Facts: Snack Corp constructed a snack bar within Retailer Corp’s store to prepare and sell its beverage and snack
products to Retailer Corp’s customers and employees. Snack Corp and Retailer Corp split the cost of construction
50/50. Snack Corp specified in its contract that Retailer Corp was required to reimburse Snack Corp for costs if its
assigned floor space was moved. The cost to Retailer Corp to relocate the snack bar will be significant, so Retailer
Corp is unlikely to reap economic benefits from substitution.
Discussion: Yes. The floor space is identified because Retailer Corp does not have a substantive substitution right.
Retailer Corp has the legal right to relocate Snack Corp’s snack bar; however, it is unlikely to reap economic
benefit from such substitution. Since there is an identified asset, Retailer Corp will need to assess whether it
controls the use of the identified asset to determine if the arrangement contains a lease.
Example 4 – Outsourced warehousing
Facts: Warehousing Corp owns a large warehouse and provides third-party logistics services to large companies.
The warehouse can be subdivided into numerous subsections by inserting removable walls. It makes available
different portions of storage space to its customers based on their respective needs.
CPG Corp contracts with Warehousing Corp to reserve 1,000 square feet of space to store its products for a threeyear period. The contract specifies that CPG Corp’s inventory will be stored in an identified location in the
warehouse and that location will be kept at a particular temperature. CPG Corp needs their products stored at a
certain temperature to keep them from spoiling. Warehousing Corp has the legal right to shift CPG Corp’s
inventory to another location within its warehouse at its discretion, subject to the requirement to provide 1,000
square feet for the three-year period. However, there is only one 1,000 square foot space that is climate-controlled
and the cost to make any other area of their warehouse climate-controlled is significant.
Discussion: Yes. Although the asset is not explicitly identified, Warehousing Corp does not have a substantive
substitution right due to the significant costs that it would incur to relocate the warehouse space. Since there is an
identified asset, Warehousing Corp will need to assess whether it controls the use of the identified asset to
determine if the arrangement contains a lease.
In depth 10
Components, contract consideration, and allocation
A contract may contain lease and nonlease components. Only lease components are subject to the balance sheet
recognition guidance in the new lease standard. Components within an arrangement are those items or activities
that transfer a good or service to the customer. Property taxes and insurance would be incurred whether or not an
asset is leased or whoever the lessee might be. Therefore, they are not considered a nonlease component but
instead are considered part of a lease component. In contrast, maintenance costs involve delivery of a separate
service to the lessee and are therefore considered a nonlease component.
Once the lease and nonlease components are identified, both lessees and lessors must allocate contract
consideration to each component. A lessee will do so based on their relative standalone prices. As a practical
expedient, a lessee may, as an accounting policy election by class of underlying asset, choose not to separate
nonlease components from lease components and instead account for a lease component and the associated
nonlease component as a single lease component.
PwC observation:
It is not uncommon in the retail and consumer industry for a lease agreement to contain nonlease components
such as maintenance. Before determining whether to elect the practical expedient to combine lease and
nonlease components for a given asset class, it will be prudent to consider the impact this will have on the
right-of-use asset and liability recorded by the lessee (i.e., increasing these balances on the balance sheet).
Differences in accounting policy elections may reduce comparability between companies.
Example 1 – Leases may have more than one component
Facts: Retailer Corp rents a building and land from Lessor Corp to be used as a retail store location for a term of
15 years. The rental contract stipulates that the store is fully furnished with integrated display cases and a newly
installed and tailored HVAC system by Lessor Corp at Lessor Corp’s cost. Retailer Corp had the option to use a 3rd
party maintenance company, but decided to hire Lessor Corp to provide all exterior building maintenance because
Lessor Corp offered a discounted price, which has been factored into the lease payment. Retailer Corp makes a
gross annual rental payment of $36,000 to Lessor Corp at the beginning of each year, which includes estimated
costs for taxes and insurance.
The remaining economic lives of the building, HVAC, and integrated display cases are 40 years, 15 years, and 15
years respectively. Assume that the lease for all lease components are operating leases and that Retailer Corp’s
incremental borrowing rate is 5%.
What are the components in the arrangement?
Discussion: There are four components in the arrangement: the building assets (retail store and HVAC), land, the
display cases, and the maintenance activities.
The retail store and HVAC are one lease component because they cannot function independently of each other.
These building assets qualify as a lease component because they are identified assets for which Retailer Corp
directs the use.
The new standard requires Retailer Corp to account for the right to use land as a separate lease component unless
the accounting effect of doing so would be insignificant—i.e., separating the land component would not affect the
lease classification of the other lease components, or the amount recognized for the land lease component is
insignificant. In this example, Retailer Corp concluded that the land component could be included as part of the
building component as it had no impact on lease classification or measurement.
The display cases are distinct and functionally independent assets and, as such, are considered a second separate
lease component.
The maintenance agreement represents delivery of goods and services and is a nonlease component.
In depth 11
To allocate contract consideration to the various lease components, Retailer Corp will need to determine the
standalone lease value for the use of the building assets (including HVAC and land), the integrated display cases,
and the maintenance services. Any discount embedded in the arrangement should be allocated between the lease
and nonlease components identified in the arrangement. Retailer Corp uses market data to allocate contract
consideration to the land/building component (including property taxes and insurance included therein), the
display cases, and the maintenance contract based on standalone prices for the 15 year usage period. These
standalone prices should be utilized to allocate the total consideration per the contract. See calculation below.
Allocated %
(A/$549,000) = (B)
$ 360,000
66%
$ 36,000
$ 23,760
Display cases
90,000
16%
36,000
5,760
Maintenance
contract
99,000*
18%
36,000
6,480
Building assets
Total
$ 549,000
100%
Annual lease
payment (C)
Allocated
lease payment
(B*C) = D
Standalone
lease value (A)
$ 36,000
*Note: Lessor Corp offered the maintenance service to Retailer Corp at a $9,000 discount to entice it to use its maintenance services.
However for purposes of allocating the lease payment to the components, the standalone (undiscounted) price is used.
In this example, Retailer Corp records a lease liability and right-of-use asset equal to $321,599 (present value of 15
payments of $29,508 ($23,760+$5,760) at 5%). If Retailer Corp elected to not separately account for the
maintenance, it would recognize a lease liability and right-of-use asset equal to $392,351 (present value of 15
payments of $36,000 at 5%).
Sale-leaseback arrangements
Existing sale-leaseback guidance, including for transactions related to real estate, is replaced with a new model
applicable to both lessees and lessors. A sale-leaseback transaction will qualify as a sale only if (1) it meets the sale
guidance in the new revenue recognition standard (ASC 606), (2) the leaseback is not a finance lease, and (3) a
repurchase option, if any, is exercisable at a price that is the asset’s fair value at the time of exercise and the asset
is not specialized. If the transaction meets these criteria, the buyer-lessor has obtained control of the underlying
asset and the seller-lessee should derecognize the underlying asset and recognize a gain or loss on sale as
appropriate. However, if the transaction does not qualify as a sale, the seller-lessee will not derecognize the
transferred asset and will reflect the sale-leaseback transaction as a borrowing. The buyer-lessor will reflect the
sale-leaseback transaction as a financing.
When evaluating whether control has been transferred to the buyer-lessor in a sale-leaseback transaction, ASC
842 requires a reporting entity to look to the transfer of control indicators in the new revenue recognition
standard. The revenue standard contains the following five indicators (not all-inclusive) to determine whether a
customer has obtained control of an asset and a sale has occurred:
1) The reporting entity (transferor) has a present right to payment
2) The customer has legal title
3) The customer has physical possession
4) The customer has the significant risks and rewards of ownership
5) The customer has accepted the asset
In depth 12
PwC observation:
Reporting entities will need to consider the control indicators in ASC 606 to determine whether a sale has
occurred. Not all of the indicators need to be met to conclude that control has transferred from seller-lessee to
buyer-lessor. Judgment will be required to determine whether a sale has occurred, and the conclusion will
depend on the specific facts and circumstances of the transaction.
In the revenue standard, sale recognition is precluded when the party that would be the seller-lessee has a
substantive repurchase option or obligation with respect to the underlying asset. Despite this prohibition in the
revenue guidance, the existence of a repurchase option does not always preclude recognition of a saleleaseback when the underlying asset is equipment readily available in the market and the option is at the thenfair market value.
However, because real estate is unique, it is difficult to envision a scenario where a reporting entity could
assert that an alternative real estate asset is substantially the same as the underlying real estate asset.
Example 1 – Sale-leaseback transactions - gain on sale
Facts: CPG Corp enters into a sale-leaseback transaction of its corporate headquarters with a buyer-lessor for cash
of $20 million. The sale price is considered to be fair market value. CPG Corp, the seller-lessee, leases back a
portion of the asset for ten years in exchange for $200,000 per year in rental payments, which is also consistent
with the market rate absent a leaseback. CPG Corp has no repurchase option. CPG Corp is required to give the
buyer-lessor a lien on its personal property as well as a significant security deposit. CPG Corp’s net carrying
amount of the asset at the date of sale is $15 million. Assume the leaseback is classified as an operating lease and
that the transaction is a sale under the new revenue recognition guidance.
How should CPG Corp account for the asset sale?
Discussion: Since the sale-leaseback transaction was executed on market terms and the leaseback is classified as
an operating lease, CPG Corp should recognize the gain on sale of $5 million at lease commencement. Under
today’s sale-leaseback guidance for real estate, CPG’s collateral would have been considered a prohibited form of
continuing involvement precluding sale-leaseback, triggering the transaction to be accounted for as a failed saleleaseback. It is worth noting that, even if no prohibited continuing involvement were present, only the gain in
excess of the present value of the minimum lease payments would be recognized immediately under today’s
guidance.
Build-to-suit arrangements
When a prospective lessee is involved in the construction or design of an underlying asset prior to lease
commencement (commonly referred to as a “build-to-suit” lease), current US GAAP imposes prescriptive
qualitative and quantitative rules that often result in the lessee being considered the owner of the asset during
construction for accounting purposes. The lessee would also be required to record debt equal to construction
funding provided by the landlord to construct the asset.
Today’s build-to-suit guidance is replaced with a new model under which a lessee is the deemed owner of an asset
under construction only if the lessee controls the asset during the construction period. Control can be obtained in
a variety of ways. Judgment will be required in assessing control, as the list provided by FASB is not all-inclusive:

The lessee has the right to obtain the partially constructed underlying asset at any point during the
construction period (for example, by making a payment to the lessor)

The lessor has an enforceable right to payment for its performance to date, and the asset does not have an
alternative use to the owner-lessor

The lessee legally owns either (a) both the land and the property improvements that are under
construction, or (b) the non-real estate asset that is under construction
In depth 13

The lessee controls the land that property improvements will be constructed upon and does not lease the
land to the lessor (or another unrelated third party) before construction starts for a period (including
renewals) that is for substantially all of the economic life of the property improvements

The lessee is leasing the land that property improvements will be constructed upon for a period (including
lessee renewal options) that is for substantially all of the economic life of the property improvements, and
does not sublease the land to the lessor (or another unrelated third party) before construction starts for a
period (including renewals) that is for substantially all of the economic life of the property
If the lessee controls the asset under construction during the construction period, the sale-leaseback model would
apply when control passes from the lessee to the lessor (typically once construction is complete and the lease
commences). If the requirements under the sale-leaseback model are not met, the transaction would be accounted
for as a financing by both the lessee and lessor.
If a lessee does not have control of the asset under construction, judgment may be required to determine how to
account for costs it incurs during construction. If such costs relate to leasehold improvements, the lessee should
generally account for those costs in accordance with ASC 360, Property, Plant, and Equipment. Payments made
by the lessee for the right to use the asset should be accounted for as lease payments regardless of when the
payments occur or the form of such payments. For example, if the lessee pays for (or contributes) construction
materials to construct the lessor’s asset, such payments are included in lease payments as prepaid rent.
PwC observation:
Lessees in the retail and consumer sectors often incur construction costs to customize their leased space. Since
the new leasing model is based on control (rather than the prescriptive and form-driven standards today), we
expect there will be fewer instances of the lessee being the accounting owner of the construction asset. This in
turn will lead to fewer build-to-suit leases being evaluated under the sale-leaseback rules. However, since
virtually all leases will result in recognition of a right-of-use asset and liability once the lease commences, the
off-balance sheet benefit during the construction period will be lost once the lease begins.
Example 1 – Build-to-suit – lessee does not obtain control of construction-in-process (real
estate)
Facts: Retailer Corp enters into an arrangement with Developer Corp to lease a building that will be used as a
restaurant for 10 years contingent upon Developer Corp completing construction of the building in accordance
with the construction plan. Developer Corp holds legal title to the land on which the building will be constructed
as well as the legal title to the building under construction. Developer Corp does not have an enforceable right to
payment for its performance to date if the arrangement terminates prior to completion of construction. The
construction plan includes Retailer Corp-specific improvements (e.g., special ventilation and HVAC in the kitchen
area for the ovens) necessary for Retailer Corp to begin operations as a restaurant at the lease commencement
date. The budgeted cost of construction is $10 million, which represents 5% of the building’s total estimated fair
value. The useful life of the asset is 40 years. Retailer Corp is obligated to reimburse Developer Corp for any
construction cost overruns from the inception date of the arrangement to the completion date of the construction
project. During the construction period, Retailer Corp has access to the building in order to inspect the progress of
the construction and to make its own tenant improvements. Retailer Corp does not have the right to buy the
partially constructed building at any point during the construction period.
Retailer Corp reimburses Developer Corp for $300,000 due to unexpected cost overruns during the construction
period. In addition, Retailer Corp incurs $200,000 of additional construction costs related to discretionary tenant
improvements, including branding elements.
In depth 14
Question 1: Does Retailer Corp control the underlying asset during the construction period?
Discussion: No, Retailer Corp does not obtain control of the building during the construction period.
Although Retailer Corp has access to the building, incurs costs related to customizing the space, and has financial
risks (overruns) related to the construction of the asset, Retailer Corp does not obtain control of the building
under construction before the lease commencement date (i.e., the construction completion date). Developer Corp
does not have an enforceable right to payment for performance to date unless and until construction is completed.
Retailer Corp does not have the right to buy the partially constructed building. In addition, none of the other
indicators of control are present.
Question 2: How should Retailer Corp account for the costs incurred during the construction period?
Discussion: The $300,000 of construction cost overruns paid by Retailer Corp are lease payments because they
relate to required costs incurred in connection with the completion of the leased asset and do not represent
payment for a good or service provided to Retailer Corp. Accordingly, Retailer Corp should recognize such costs as
prepaid rent. Retailer Corp should account for the $200,000 of construction costs incurred as lessee assets (i.e.,
leasehold improvements) that would be depreciated over the shorter of their useful lives or the lease term.
In depth 15
About PwC’s Retail and Consumer practice
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geographies and all segments of the R&C sector, serving the food & beverage, health & beauty care, tobacco &
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For more information, please contact:
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US Retail and Consumer Leader
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[email protected]
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[email protected]
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executives.
March 15, 2016
NDS 2016-03
Accounting for financial instruments
ASU 2016-01 codifies improvements to recognition and measurement guidance
Summary
In January 2016 the FASB issued ASU 2016-01, Financial Instruments – Overall (Subtopic 825-10):
Recognition and Measurement of Financial Assets and Financial Liabilities, to make targeted
improvements to U.S. GAAP on accounting for financial instruments. This bulletin summarizes the
guidance in ASU 2016-01.
The guidance in ASU 2016-01 makes targeted improvements to how entities

Account for equity investments

Present and disclose financial instruments

Measure the valuation allowance on deferred tax assets related to available-for-sale debt securities
The guidance in ASU 2016-01 is effective for “public business entities,” as defined, for fiscal years
beginning after December 15, 2017, including interim periods within those fiscal years. For all other
entities, including not-for-profit entities and employee benefit plans within the scope of ASC 960 through
965 on plan accounting, the guidance is effective for fiscal years beginning after December 15, 2018 and
for interim periods within fiscal years beginning after December 15, 2019.
Early application of the guidance in ASU 2016-01 is not permitted, with certain exceptions that are
discussed in Section F.
Contents
A. Overview ................................................................................................................................................. 2
B. Accounting for equity investments .......................................................................................................... 3
Scope ...................................................................................................................................................... 3
Measurement of equity investments ....................................................................................................... 3
Measurement exception ................................................................................................................... 3
Identifying similar investment of same issuer ............................................................................ 4
Impairment of equity investments measured using measurement exception ........................... 5
Forward contracts and purchased options to buy equity investments ................................................... 5
Measurement exception for forward contracts and purchased options ........................................... 6
C.
D.
E.
F.
2
Disclosures about equity investments .................................................................................................... 6
Equity investments measured using the measurement exception .................................................. 6
All equity investments ...................................................................................................................... 6
Cash flow presentation of equity investments ........................................................................................ 7
Presentation of equity investments in a classified balance sheet .......................................................... 7
Hedging .................................................................................................................................................. 7
Presentation and disclosure of financial instruments ............................................................................. 7
Presentation of instrument-specific credit risk of a financial liability....................................................... 7
Instrument-specific credit risk .......................................................................................................... 8
Fair value of financial instruments not measured at fair value on a recurring basis .............................. 8
Measuring fair value for disclosure purposes .................................................................................. 9
Financial instruments exempt from fair value disclosure .......................................................... 9
Disaggregated information about financial instruments ......................................................................... 9
Measuring valuation allowance on deferred tax assets related to available-for-sale debt securities .... 9
Amendments to industry-specific guidance .......................................................................................... 10
Insurance .............................................................................................................................................. 10
Not-for-profit entities ............................................................................................................................. 10
Effective date and transition ................................................................................................................. 10
Effective date ........................................................................................................................................ 10
Early adoption ....................................................................................................................................... 10
Transition .............................................................................................................................................. 11
Transition disclosures ........................................................................................................................... 11
A. Overview
The FASB completed the recognition and measurement section of its financial instruments project with
the issuance of ASU 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities.
The guidance in ASU 2016-01 makes targeted improvements to the following areas in U.S. GAAP, which
will be discussed in greater detail in this bulletin:

How to account for equity investments

How to present and disclose financial instruments

How to measure the valuation allowance on deferred tax assets related to available-for-sale debt
securities
The classification and measurement of financial instruments represents one of the three sections within
the overall financial instruments project, along with measuring credit losses on financial assets and
accounting for hedges, which are still being deliberated by the FASB.
Initially, the primary aim of the recognition and measurement section of the project was to simplify
accounting for financial instruments and to converge the guidance between U.S. GAAP and IFRS.
However, after issuing two exposure drafts in 2010 and in 2013, the FASB decided to focus on
developing targeted improvements to current U.S. GAAP instead of devising new accounting models and
converging the guidance between U.S. GAAP and IFRS. The FASB believes that such targeted
improvements enhance the reporting model for financial instruments and will provide users of financial
statements with more decision-useful information.
3
B. Accounting for equity investments
ASU 2016-01 adds a new Topic (ASC 321, Investments – Equity Securities) to the FASB Accounting
Standards Codification®, which provides guidance on accounting for all equity investments. Prior to the
issuance of ASU 2016-01, the guidance on accounting for equity investments was included in multiple
topics.
Scope
The guidance in ASC 321 applies to all equity investments, including equity securities, partnership
interests, and ownership interests both in unincorporated joint ventures and in limited liability companies.
The guidance excludes the following types of equity investments:

Derivative instruments

Equity investments that are accounted for under equity method

Equity investments that require the investor to consolidate the investee

Ownership interests in an exchange (generally held by broker-dealers and by depository and lending
institutions)

Federal Home Loan Bank and Federal Reserve Bank stock (generally held by broker-dealers and by
depository and lending institutions)
Investments in qualified housing projects
The scope of the guidance in ASC 321 does not exclude ownership interests in limited liability
entities that invest in qualified housing projects; however, an entity may elect to account for
such investments in accordance with the guidance in ASC 323-740, Investments – Equity
Method and Joint Ventures: Income Taxes, using the cost, proportional amortization, or equity
method.
Measurement of equity investments
The guidance in ASC 321 requires all equity investments that are within its scope to be measured at fair
value, with changes in fair value recognized in net income.
Measurement exception
The guidance in ASC 321 allows a measurement exception for those equity investments that do not have
a “readily determinable fair value,” as defined, and do not qualify to be measured using the practical
expedient to estimate fair value at net asset value (NAV) of the investee in accordance with ASC 820-1035-59, Fair Value Measurement and Disclosure. The measurement exception allows those investments to
be measured at their cost minus impairment, if any, plus or minus changes resulting from observable
price changes in “orderly transactions,” as defined, for the identical or a similar investment of the same
issuer.
4
Orderly transactions
U.S. GAAP defines an “orderly transaction” as a transaction that assumes exposure to the
market for a period before the measurement date to allow for marketing activities that are usual
and customary for transactions involving such assets or liabilities; it is not a forced transaction
(for example, a forced liquidation or distress sale).
Entities will need to use judgment in assessing whether or not an observable transaction in the
same or a similar equity investment without a readily determinable fair value is orderly,
especially when there is an insignificant observable volume or level of activity. We believe,
however, that entities should presume that an observable transaction in a similar or the same
equity investment is orderly, unless there are circumstances that would indicate otherwise (for
example, if the seller is in or near bankruptcy or receivership or is required to sell to meet
regulatory or legal requirements).
The election to measure an equity investment under the measurement exception should be made
separately for each investment. Once an entity chooses to apply the measurement exception to measure
an equity investment it holds, it should continue to measure the investment under the measurement
exception, unless the equity investment meets any one of the following conditions:

It obtains a “readily determinable fair value.”

It is eligible to be measured at NAV of the investee.

It is no longer within the scope of the guidance in ASC 321 (for example, if the equity investment must
be accounted for under the equity method of accounting).
Measurement exception: an accounting policy
The election to measure an equity investment using the measurement exception is an
accounting policy election. Therefore, we believe that changing the measurement method of an
equity investment that is measured using the measurement exception would require an entity to
follow the change in accounting policy guidance in ASC 250, Accounting Changes and Error
Corrections, unless the investment meets one of the criterion identified above.
Identifying similar investment of same issuer
As noted in the preceding section, observable price changes in orderly transactions for the same or a
similar equity investment of the same issuer must be recognized in net income for equity investments
without readily determinable fair values for which the measurement exception is elected. Entities will need
to use judgement in identifying similar investments of the same issuer. The guidance on identifying similar
investments of the same issuer in ASC 321 states that entities should consider the different rights and
obligations of the securities, such as voting rights, distribution rights and preferences, and conversion
5
features, to assess whether the equity investment held by the entity is similar to the equity investment in
which an observable price change has occurred.
If the equity investment held by the entity is similar to the equity investment in which an observable price
change has occurred, the entity is required to measure the equity investment at its fair value as of the
date of the observable transaction. Such fair value measurement will require adjusting the observable
price upward or downward for the differences in rights and obligations between the equity investment it
holds and the similar security.
An observable price change in an equity investment of the same issuer that is not similar to the equity
investment held by the entity should not be used to record an adjustment to the carrying amount of equity
investment held by the entity; however, such an observable price change may be considered as one of
the indicators while performing a qualitative assessment for impairment of equity investments measured
using the measurement exception.
Impairment of equity investments measured using measurement exception
Equity investments that are measured using the measurement exception should be qualitatively
evaluated for impairment at each reporting period. The impairment indicators include

A significant deterioration in the earnings performance, credit rating, asset quality, or business
prospects of the investee

A significant adverse change in the regulatory, economic, or technological environment of the
investee

A significant adverse change in the general market condition of either the geographical area or the
industry in which the investee operates

A bona fide offer to purchase, an offer by the investee to sell, or a completed auction process for the
same or a similar investment for an amount less than the carrying amount of that investment

Factors that raise significant concerns about the investee’s ability to continue as a going concern,
such as negative cash flows from operations, working capital deficiencies, or noncompliance with
statutory capital requirements or debt covenants
If a qualitative assessment indicates that an equity investment is impaired, the entity should measure the
equity investment’s fair value and record the difference between that fair value and the carrying value of
the equity investment as an impairment loss in net income.
Forward contracts and purchased options to buy equity investments
Forward contracts and purchased options to acquire equity investments that meet all of the following
characteristics should be accounted for as if the entity holds the underlying equity investment:

The contract is entered into to purchase investments that qualify for accounting under ASC 321.

The contract’s terms require physical settlement of the contract by delivery of the securities.

The contract is not a derivative instrument subject to the guidance in ASC 815, Derivatives and
Hedging.

The contract, if a purchased option, has no intrinsic value at acquisition.
6
Therefore, such forward contracts and purchased options must be measured at fair value at each
reporting period, with changes in the fair value recognized in net income, unless the underlying equity
investment is eligible to be measured using the measurement exception.
All equity investments purchased under a forward contract or by exercising an option must be recorded at
their fair value at the settlement date.
Measurement exception for forward contracts and purchased options
Forward contracts and purchased options to acquire equity investments may be measured using the
measurement exception if the underlying equity investment is eligible for the measurement exception.
Therefore, such forward contracts and purchased options should be measured at cost minus impairment,
if any, plus or minus changes resulting from observable price changes in orderly transactions for the
identical or a similar investment of the same issuer.
The guidance in ASU 2016-01 requires the carrying value of a forward contract or purchased option to be
marked upward or downward when there is an observable price change or an impairment in the
underlying equity investment or a similar equity investment of the same issuer, even though the
observable price change in the equity investment underlying a forward contract or purchased option is
generally only one of the inputs used to measure the contract or option.
Disclosures about equity investments
ASC 321 introduces one new disclosure requirement for equity investments measured using the
measurement exception and carries forward the disclosure requirement for trading classified equity
securities from ASC 320, Investments – Debt and Equity Securities, which will apply to all equity
investments rather than applying only to those with a readily determinable fair value.
Equity investments measured using the measurement exception
The new guidance requires an entity to disclose the following information about equity investments that
are measured using the measurement exception, both in interim and in annual reporting periods:

Carrying amount

Amount of impairment and downward adjustments recognized both during the annual period and
cumulative

Amount of upward adjustments recognized both during the annual period and cumulative

Information (in narrative form) that management considered to determine the amount of impairment
and downward or upward adjustments
All equity investments
The guidance in ASU 2016-01 requires an entity to disaggregate the net gains and losses on the equity
investments recognized in the income statement during a reporting period into realized and unrealized
gains and losses.
7
Example of disaggregated disclosure
Net gains and losses recognized during the period on
$105
equity securities
Less: Net gains and losses recognized during the
(80)
period on equity securities sold during the period
Unrealized gains and losses recognized during the
$ 25
reporting period on equity securities still held at the
reporting date
Cash flow presentation of equity investments
The guidance in ASU 2016-01 requires an entity to classify cash flows from purchases and sales of equity
investments on the basis of the nature and purpose for which it acquired the securities. This guidance is
the same as the guidance for debt securities classified as trading in ASC 320.
Presentation of equity investments in a classified balance sheet
The guidance in ASU 2016-01 states that marketable equity investments representing the investment of
cash available for current operations must be included in current assets.
Hedging
The guidance in ASU 2016-01 prohibits entities from designating equity investments as a hedged item or
transaction.
C. Presentation and disclosure of financial instruments
Presentation of instrument-specific credit risk of a financial liability
The existing guidance in ASC 825 gives entities an option to carry certain financial liabilities at fair value
and requires them to recognize these change in fair value in net income. The guidance in ASU 2016-01
amends this guidance by requiring entities to present the portion of the fair value change that results from
instrument-specific credit risk in other comprehensive income. The amount that is recognized in other
comprehensive income will be recycled through net income upon derecognition of the related financial
liability (a financial liability is derecognized only if the debtor has extinguished the liability by either paying
the creditor or being legally released, either judicially or by the creditor, from being the primary obligor
under the liability).
8
This presentation guidance is limited to liabilities that are measured at fair value in accordance with the
fair value option guidance in ASC 825. Therefore, other liabilities that are measured at fair value, for
example, derivative liabilities, are not within the scope of this provision, and the total fair value change for
such liabilities should be presented in net income.
Instrument-specific credit risk
The guidance in ASU 2016-01 does not define instrument-specific credit risk, but provides guidance to
measure such risk. The entity may use either of the following methods to measure instrument-specific
credit risk:

The portion of the total change in fair value that excludes the amount resulting from a change in a
base market risk, such as a risk-free rate or a benchmark interest rate

Any other method that faithfully represents the portion of the total change in fair value resulting from a
change in instrument-specific credit risk
The method that the entity chooses to measure instrument-specific credit risk should be used consistently
for each financial liability from period to period. An entity may, however, choose different methods to
measure the instrument-specific credit risk of different liabilities for which the fair value option in ASC 825
is elected.
Instrument-specific credit risk of nonrecourse liabilities
The guidance in ASU 2016-01 allows entities to continue to present the instrument-specific
credit risk of nonrecourse financial liabilities of consolidated collateralized financing entities in
net income, instead of separately presenting them in other comprehensive income. Even though
the guidance in ASU 2016-01 does not specifically address the presentation of instrumentspecific credit risk of nonrecourse liabilities that are held by a reporting entity, paragraph BC112
in the Basis for Conclusions clarifies that the new guidance does not intend to change how
entities identify and measure the changes in instrument-specific credit risk that was disclosed
under the requirements of previous U.S. GAAP; rather, the new guidance only intends to
change the presentation of the disclosed amount in the statement of comprehensive income.
The Board also acknowledged that entities did not disclose changes in instrument-specific credit
risk for nonrecourse liabilities under the guidance in previous U.S. GAAP.
We believe that when applying the presentation and measurement guidance in ASU 2016-01 for
instrument-specific credit risk, entities may also look at the guidance in paragraph B5.7.13 of
IFRS 9, Financial Instruments, which states that “The credit risk on the collateralised liability will
be less than the credit risk of the non-collateralised liability. The credit risk for a collateralised
liability may be close to zero.”
Fair value of financial instruments not measured at fair value on a recurring basis
The new guidance exempts all entities, except public business entities, from disclosing the fair value of
financial instruments that are not measured at fair value on a recurring basis.
9
Public business entities must continue to disclose the fair value of financial instruments not measured at
fair value on a recurring basis, but are no longer required to disclose the following information:

The methods and significant assumptions used to estimate the fair value

Description of the changes in the method(s) and significant assumptions used to estimate the fair
value of financial instruments, if any, during the period
Measuring fair value for disclosure purposes
The new guidance requires entities to use the exit price notion in ASC 820 in calculating the fair values of
financial instruments not measured at fair value on a recurring basis. It also eliminates the guidance that
allowed entities to calculate the fair value of certain financial instruments, such as loan receivables and
long-term debt, using an entry price notion.
Financial instruments exempt from fair value disclosure
The new guidance adds the following three financial instruments to the list of financial instruments not
measured at fair value on a recurring basis that are exempt from the fair value disclosure requirements:

Investments in equity securities measured using the measurement exception

Trade receivables and payables due in one year or less

Deposit liabilities with no defined maturities or contractual maturities
Disaggregated information about financial instruments
The guidance in ASU 2016-01 requires that entities provide disaggregated information about the financial
assets and financial liabilities by measurement categories (that is, fair value through net income, fair
value through other comprehensive income, and amortized cost). An entity should further disaggregate
the financial assets it holds by their form (that is, securities, and loans and receivables).
D. Measuring valuation allowance on deferred tax assets related to
available-for-sale debt securities
The guidance in ASC 740 requires entities to reduce the carrying amount of deferred tax assets, if
necessary, by the amount of any tax benefit that is not expected to be realized. The guidance in
ASU 2016-01 further clarifies that an entity should evaluate the need for a valuation allowance on a
deferred tax asset related to available-for-sale debt securities in combination with the entity’s other
deferred tax assets.
This clarification eliminates the diversity in practice where some entities were evaluating the need for a
valuation allowance on deferred tax assets related to available-for-sale debt securities separately from
other deferred tax assets. For example, an entity’s intent and ability to hold the available-for-sale debt
security with unrealized losses until recovery, which may not be until maturity, will no longer be
considered a tax-planning strategy, even if the specific deferred tax assets are expected to reverse as
time passes.
10
E. Amendments to industry-specific guidance
Insurance
ASU 2016-01 removes the specific guidance that requires insurance entities to measure equity
investments without readily determinable fair value similarly to available-for-sale equity securities. Upon
adoption of the guidance in ASU 2016-01, insurance companies should account for all equity investments
under the guidance in ASC 321. See Section B above, which summarizes the guidance in ASC 321.
Not-for-profit entities
ASU 2016-01 adds a new Subtopic to the Codification, ASC 958-321, Not-for-Profit Entities: Investments
– Equity Securities, which includes guidance for accounting for equity investments held by a not-for-profit
entity. In addition, ASU 2016-01 rewrites the guidance in ASC 958-320, Investments – Debt Securities, to
enhance reading comprehensibility. It also moves guidance on income statement presentation for
investments by not-profit-entities to ASC 958-225, Income Statement. The guidance in ASU 2016-01 also
removes the guidance in ASC 958-325, Investments – Others, on measuring certain equity investments,
such as venture capital funds, partnership interests, and equity securities without readily determinable fair
values at cost, and requires not-for-profit entities to account for such investments in accordance with
ASC 321 and ASC 958-321 upon adoption of the ASU.
F. Effective date and transition
Effective date
The guidance in ASU 2016-01 is effective as follows:

For public business entities: Fiscal years, and interim periods within those fiscal years, beginning
after December 15, 2017

For all other entities: Fiscal years beginning after December 15, 2018, and interim periods within
fiscal years beginning after December 15, 2019.
Early adoption
Early adoption of the guidance in ASU 2016-01 is not permitted, with the following exceptions:

Entities that are not public business entities may early adopt the new guidance as of the effective
date for public business entities—that is, for fiscal years, and interim periods within those fiscal years,
beginning after December 15, 2017.

The following provisions can be adopted in the financial statements of fiscal years or interim periods
that have not yet been issued or have not yet been made available for issuance as of January 5,
2016:

Presentation of instrument-specific credit risk in other comprehensive income for all entities

Discontinuation of the fair value disclosures for financial instruments not measured at fair value
by entities that are not public business entities
11
Transition
The guidance in ASU 2016-01 should be applied by adjusting the opening balance sheet of the fiscal year
of adoption, with a corresponding adjustment to the opening balance of the retained earnings. The
guidance related to the measurement and disclosure of equity investments without readily determinable
fair value is applicable prospectively to those investments that exist as of the date of adoption. Similarly,
the guidance that requires using the exit price notion in ASC 820 to measure fair value of financial
instruments for disclosure purposes is applicable prospectively.
Transition disclosures
The following transition disclosures are required in the annual financial statements of the period of
adoption for all entities. If an entity issues interim financial statements, then these disclosures should be
provided in each interim financial statement of the fiscal year of adoption:

The nature and reason for the change in accounting principle, including an explanation of the newly
adopted accounting principle.

The method of applying the change.

The effect of the adoption on any line item in the statement of financial position, if material, as of the
beginning of the fiscal year; however, presentation of the effect on financial statement subtotals is not
required.

The cumulative effect of the change on retained earnings or other components of equity in the
statement of financial position as of the beginning of the fiscal year.

If the prior-year amounts disclosed for comparative purposes are no longer comparable because of
measuring the fair value of financial instruments under ASC 820, the new guidance requires an entity
to disclose this fact in conformity with the guidance in ASC 205-10.
© 2016 Grant Thornton LLP, U.S. member firm of Grant Thornton International Ltd. All rights reserved.
This Grant Thornton LLP bulletin provides information and comments on current accounting and tax
issues and developments. It is not a comprehensive analysis of the subject matter covered and is not
intended to provide accounting, tax, or other advice or guidance with respect to the matters addressed in
the document. All relevant facts and circumstances, including the pertinent authoritative literature, need to
be considered to arrive at conclusions that comply with matters addressed in this document.
Moreover, nothing herein shall be construed as imposing a limitation on any person from disclosing the
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For additional information on topics covered in this document, contact your Grant Thornton LLP
professional.
No. US2016-01
January 29, 2016
What’s inside:
Background ..................... 1
Key provisions ................. 2
Accounting for equity
investments.......................... 2
Financial liabilities
and the fair value
option ................................... 5
Loans and debt
securities .............................. 6
Deferred tax assets ................. 6
Presentation and
disclosure ............................. 6
Transition ............................... 7
What’s next ...................... 7
New guidance on recognition and
measurement to impact financial instruments
At a glance
The FASB issued the new recognition and measurement guidance on January 5, 2016.
The changes to the current US GAAP financial instruments model primarily affect the
accounting for equity investments, financial liabilities under the fair value option, and
the presentation and disclosure requirements for financial instruments.
No significant changes were made to the recognition and measurement guidance for
investments in loans and debt securities.
The standard is effective for public business entities for annual periods (and interim
periods within those annual periods) beginning after December 15, 2017. All other
entities will need to apply the standard for annual periods beginning after December
15, 2018, and for interim periods beginning after December 15, 2019.
Background
.1 On January 5, 2016, the FASB issued Accounting Standards Update 2016-01,
Financial Instruments–Overall: Recognition and Measurement of Financial Assets and
Financial Liabilities (the “ASU”). Once effective, the ASU will apply to the recognition
and measurement of certain financial instruments for all entities.
.2 The recognition and measurement project started as a joint project with the IASB,
with an objective of improving the decision usefulness of financial statements by
simplifying and harmonizing the accounting for financial instruments. The recognition
and measurement guidance is the first ASU issued under the FASB’s financial
instruments project. The ASU for the new impairment guidance is expected in the
upcoming months. An exposure draft of the new hedging guidance is expected in the first
half of 2016.
.3 The most recent exposure draft for the recognition and measurement project (issued
in February 2013) proposed significant changes to current US GAAP guidance, including
an accounting model that linked the measurement of an entity’s financial assets to its
cash flow characteristics and the manner in which the entity expected to benefit from the
related cash flows. The measurement of financial liabilities also would have taken into
account whether the entity expected to pay the contractual cash flows or to settle the
liability at its fair value.
.4 The FASB noted that while the current accounting for the subsequent measurement
of financial instruments is complex, stakeholders have learned how to navigate that
complexity to obtain the information they need. The FASB also noted that the 2013
proposed ASU (which was more consistent with IFRS 9) would simply have replaced the
In depth
1
known complexities under current US GAAP with an unknown amount and type of
complexity. As a result, the FASB discarded many of the proposals in the 2013 exposure
draft and instead decided to make targeted improvements while retaining much of
today’s recognition and measurement model for financial instruments.
Key provisions
.5 The new guidance will impact the accounting for equity investments, financial
liabilities under the fair value option, and the presentation and disclosure requirements
for financial instruments. In addition, the FASB clarified the need for a valuation
allowance on deferred tax assets resulting from unrealized losses on available-for-sale
debt securities. The accounting for other financial instruments, such as loans,
investments in debt securities, and financial liabilities not under the fair value option is
largely unchanged.
Accounting for equity investments
.6 The ASU makes significant changes to the accounting for equity investments. The
ASU’s accounting model will apply to all types of equity investments, including equity
instruments that meet the definition of a security (as provided under current US GAAP)
and those that would not be considered securities (e.g., limited partnership interests).
Equity investments included in the scope of the new guidance may include investments
in the equity of investment companies that hold nothing but debt securities, as the ASU
does not permit an investor to “look through” the investment to determine the
appropriate recognition and measurement model.
.7 The guidance also applies to forwards and options to acquire and dispose of
ownership interests that are not accounted for as derivative instruments under ASC 815,
Derivatives and Hedging. For example, the ASU applies to a gross physically-settled
forward contract to purchase equity shares that are not deemed to be readily convertible
to cash.
Equity investments with readily determinable fair values
.8 All equity investments in unconsolidated entities (other than those accounted for
using the equity method of accounting) will generally be measured at fair value through
earnings. There will no longer be an available-for-sale classification (changes in fair value
reported in other comprehensive income) for equity securities with readily determinable
fair values.
.9 Equity securities have no maturity date, and therefore the primary way an entity
realizes the value of their investment (aside from dividends) is through sale. As such, the
FASB believes that “fair value through earnings” is the most appropriate measurement
and recognition method for equity investments in unconsolidated entities not accounted
for under the equity method.
PwC observation:
The FASB considered providing an exception to the fair value through earnings
measurement model for equity securities deemed to be strategic investments, as
entities may be able to realize the value from these types of investments by means
other than sale or collecting dividends. Developing a definition of a strategic
investment proved difficult, and the FASB concluded that providing an exception
would add complexity to the accounting model that would not be worth the perceived
benefits.
In depth
2
Equity investments without readily determinable fair values
.10 Under current US GAAP, an unconsolidated investment in an equity security without
a readily determinable fair value that is not accounted for by the equity method is
measured at cost, less any impairment determined to be other than temporary.
.11 The ASU generally eliminates the cost method for these investments. However,
entities (other than those following “specialized” accounting models, such as investment
companies and broker-dealers) will be able to elect to record equity investments without
readily determinable fair values at cost, less impairment, adjusted for subsequent
observable price changes. Entities that elect this measurement alternative will report
changes in the carrying value of the equity investments in current earnings.
.12 If this measurement alternative is elected, changes in the carrying value of the equity
investment will be required to be made whenever there are observable price changes in
orderly transactions for the identical or similar investment of the same issuer. The
implementation guidance notes that an entity should make a “reasonable effort” to
identify price changes that are known or that can reasonably be known. The
implementation guidance also indicates that in determining whether a security issued by
the same issuer is similar, an entity should consider differences in the rights and
obligations of the securities. Differences in rights and obligations may indicate that the
security is not similar (and thus the observable price would not be used to adjust the
carrying value of the equity investment held) or may indicate that the observable price
should be adjusted to reflect such differences.
.13 The measurement alternative may be elected separately on an investment by
investment basis for each equity investment without a readily determinable fair value.
Once elected, it should be applied consistently as long as the investment meets the
qualifying criteria. The standard requires that the entity reassess whether the investment
continues to qualify for the measurement alternative each reporting period. If, for
example, the investee subsequently undergoes an initial public offering such that there is
now a readily determinable fair value, the measurement alternative would no longer be
permitted, and the investment would be prospectively measured at fair value in
accordance with ASC 820, Fair Value Measurement.
PwC observation:
The application of the measurement alternative will require new processes, controls,
and procedures and will require the exercise of significant professional judgment. For
example, entities will need to establish procedures to identify observable prices for
the same or similar securities and to adopt policies for determining what types of
securities would be considered similar for the purposes of determining whether an
observable price of a different security should be utilized to adjust the basis of the
security owned. Entities will also have to establish internal controls to ensure that
each equity investment subject to the measurement alternative is evaluated each
reporting period to ensure that it continues to meet the qualifying criteria (i.e., the
equity security does not have a readily determinable fair value).
While there is no explicit requirement in the ASU for the preparation of
contemporaneous documentation of the election of the measurement alternative, we
believe entities should consider establishing procedures to evidence the election at
the time an investment is made.
In depth
3
.14 If the election is not made, equity investments without readily determinable fair
values should be reported at fair value in accordance with the provisions of ASC 820,
with all subsequent changes in fair value recorded in earnings.
PwC observation:
Obtaining the necessary information to support a valuation prepared in accordance
with ASC 820 for investments without readily determinable fair values can be time
consuming and may require the assistance of third-party valuation professionals.
Given the potential amount of time and expense involved with obtaining valuations
for each equity investment for each reporting period, entities should carefully
evaluate the costs and benefits associated with electing full fair value versus the
measurement alternative.
Impairment model for equity investments without readily determinable fair
values
.15 The ASU includes a new impairment model for equity investments without readily
determinable fair values. The new model is a single-step, unlike today’s two-step
approach.
.16 Under the single-step model, an entity is required to perform a qualitative
assessment each reporting period to identify impairment. When a qualitative assessment
indicates that an impairment exists, the entity will need to estimate the fair value of the
investment and recognize in current earnings an impairment loss equal to the difference
between the fair value and the carrying amount of the equity investment.
.17 The single-step model is intended to reduce subjectivity, improve comparability, and
increase representation faithfulness of the financial statements. In addition, the FASB
looked to reduce the burden on preparers of financial statements by eliminating the need
to forecast whether an equity investment will eventually recover value.
.18 The measurement alternative was established, in part, to provide entities with relief
from having to get a valuation prepared each reporting period for equity investments
without readily determinable fair values. The use of a qualitative impairment model is
consistent with that objective. A quantitative impairment analysis does not need to be
prepared, unless the qualitative assessment indicates that the fair value of the investment
is less than its carrying value. The ASU provides a representative, but not all inclusive list
of impairment indicators, which includes a “significant” deterioration or “significant”
adverse change, or “significant” concerns about the investee’s ability to continue as a
going concern. The significance of these factors should be evaluated relative to the
conditions that existed at the time of the investment’s acquisition or last adjustment for
either an impairment or an observable price. Considerable judgment will need to be
applied in determining when an impairment indicator is significant enough to warrant
preparation of a full quantitative valuation.
PwC observation:
The ASU does not include a threshold to be met in order for an equity investment to
be evaluated for impairment (i.e., the model does not consider whether an
impairment is “probable” or “more likely than not”). Rather, the qualitative
assessment is used to identify the presence of significant impairment indicators. The
presence of one or more indicators does not necessarily mean an equity investment is
impaired. However, it does mean the entity is required to perform a valuation to
determine whether an impairment exists (i.e., whether fair value is below the carrying
value of the equity investment).
In depth
4
Financial liabilities and the fair value option
.19 The impact of changes in instrument-specific credit risk on liabilities for which the
fair value option has been elected is reported in current earnings under current US
GAAP. This resulted in gains when the entity’s credit deteriorated and losses when it
improved. While preparers and users understood the theory behind these
counterintuitive outcomes, some questioned the value of this reporting given that such
impacts may not be realizable. Many entities removed this amount from earnings in nonGAAP measures, because they believed the amount was not useful in analyzing an
entity’s financial performance.
.20 Under the ASU, when the fair value option has been elected for financial liabilities,
changes in fair value due to instrument-specific credit risk will be recognized separately
in other comprehensive income (OCI). This provision does not apply to financial
liabilities required to be measured at fair value with changes in fair value recognized in
current earnings. For example, this guidance would not apply to derivative instruments.
.21 The accumulated gains and losses due to changes in instrument-specific credit risk
will be recycled from accumulated other comprehensive income and recognized in
earnings if the financial liability is settled before maturity.
.22 In 2014, the FASB provided an alternative measurement for collateralized financing
entities (CFEs) that eliminated the measurement difference that may exist when financial
assets and financial liabilities of the CFE are measured independently at fair value. A
requirement for CFEs to record changes in fair value due to instrument-specific credit
risk in OCI would have generated a new measurement difference for these entities, as
changes in credit risk related to financial assets would continue to impact earnings. As a
result, the final ASU specifies that the guidance related to instrument-specific credit risk
does not apply to financial liabilities of a CFE measured using the alternative
measurement.
PwC observation:
During its deliberations, the Board also discussed other instances when preparers
elected the fair value option on non-recourse liabilities to avoid a mismatch in
recognition from the assets that support them. They noted that some entities do not
disclose changes in instrument-specific credit risk for nonrecourse liabilities. The
Board explains in the basis of conclusion that they did not intend to change how
entities were identifying and measuring changes in instrument-specific credit risk
from what is currently disclosed under US GAAP. While no guidance was formally
included in the codification, we understand that the Board believes that entities can
continue their current disclosure practices in this area both with respect to disclosure
and what is included in OCI.
.23 The ASU allows, but does not require, preparers to measure the change in
instrument-specific credit risk as the portion of the periodic change in fair value that is
not due to changes in a base market rate, such as a risk-free interest rate. A reporting
entity will be able to use an alternative method if it believes it to be a more faithful
measurement of the change in credit risk for the entity. The selected methodology is a
policy election and will need to be disclosed and consistently applied to each financial
liability from period to period.
.24 No significant changes were made to the recognition and measurement of liabilities
for which the fair value option has not been elected.
In depth
5
Loans and debt securities
.25 With the exception of those instruments for which the fair value option has been
elected, the ASU does not make significant changes to the recognition and measurement
guidance for investments in loans and debt securities.
PwC observation:
The FASB’s project on credit losses will have a significant impact on how credit losses
will be measured on loans and debt securities. That guidance is expected to be issued
in the upcoming months.
Deferred tax assets
.26 Unrealized losses on available-for-sale debt securities are recognized in other
comprehensive income and typically give rise to deferred tax assets. A valuation
allowance is required to the extent it is more likely than not that a deferred tax asset is
not realizable. Historically, entities applied one of two views. The need for a valuation
allowance on a deferred tax asset related to available-for-sale securities was assessed
either (1) in combination with the entity's other deferred tax assets, or (2) separately
from other deferred tax assets and considered to be inherently recoverable so long as the
related debt securities were expected to be held until they recovered in value (i.e.,
maturity, if necessary). The second view was supportable even if a valuation allowance
was required on other deferred tax assets of a company.
.27 Although the latter approach was accepted by the SEC, the Board ultimately saw no
conceptual basis for separately analyzing deferred tax assets for available-for-sale debt
securities.
.28 The ASU requires that these deferred tax assets be evaluated for realizability in
combination with other deferred tax assets of an entity. This approach is consistent with
IFRS.
Presentation and disclosure
.29 The ASU makes targeted changes to the presentation requirements for financial
instruments under current US GAAP. In addition to the change discussed above related
to instrument-specific credit risk, the ASU requires separate presentation of financial
assets and financial liabilities by measurement category and form of financial asset (e.g.,
securities or loans and receivables) on the balance sheet or in the accompanying notes to
the financial statements.
.30 With regard to disclosure, the ASU eliminates the requirement for entities that are
not public business entities (PBEs) to present fair value information for financial assets
and liabilities measured at amortized cost. PBEs will continue to be required to present
this information either parenthetically on the face of the balance sheet or in the notes to
the financial statements. PBEs do not need to provide fair value information for
receivables and payables due within one year and demand deposit liabilities. The board
concluded that the benefit to financial statement users of disclosing such information did
not justify the likely cost for non-PBEs.
.31 PBEs will be required to determine fair value for financial assets and liabilities based
on the exit price notion in ASC 820, Fair Value Measurement. This may represent a
change in practice for some entities that had previously provided fair value information
for loans carried at amortized cost using an entry price based on their interpretation of
the illustrative examples in ASC 825, Financial Instruments.
In depth
6
.32 All entities will be required to disclose financial assets and financial liabilities
separately, grouped by measurement category (e.g., fair value, amortized cost, lower of
cost or market) and form of financial asset (e.g., loans, securities).
.33 For equity investments without readily determinable fair values measured under the
measurement alternative, the ASU requires disclosures of:

the carrying value of such investments;

the total amount of adjustments resulting from impairment; and

the total amount of adjustments for observable prices.
Transition
.34 In general, the new guidance will require modified retrospective application to all
outstanding instruments, with a cumulative effect adjustment recorded to opening
retained earnings as of the beginning of the first period in which the guidance becomes
effective. However, changes to the accounting for equity securities without a readily
determinable fair value will be applied prospectively.
PwC observation:
The ASU requires that the changes to the accounting for equity securities without
readily determinable fair values to be applied prospectively. The Board made this
decision. principally to eliminate the need for preparers to retrospectively identify
impairments using the new single-step model and observable price changes for the
same or similar instruments that may have occurred in prior periods for entities that
elect to apply the measurement alternative.
This means that any impact from the adoption of this ASU on equity securities
without readily determinable fair values will not be reported as part of the transition
adjustment. Instead, these impacts will be recorded after the transition date and will
impact that period’s current earnings.
What’s next?
.35 The new guidance will be effective for PBEs in fiscal years beginning after December
15, 2017, including interim periods within those fiscal years. All other entities, including
certain not-for-profit entities and employee benefit plans, will have an additional year, or
may early adopt coincident with the PBE effective date. For these entities, the guidance
will be effective in fiscal years beginning after December 15, 2018 and interim periods
within fiscal years beginning after December 15, 2019.
.36 All entities can early adopt the provision to record fair value changes for financial
liabilities under the fair value option resulting from instrument-specific credit risk in
other comprehensive income. Entities that are not PBEs can early adopt the provision
permitting the omission of fair value disclosures for financial instruments reported at
amortized cost. Early adoption of these provisions can be elected for all financial
statements of fiscal years and interim periods that have not yet been issued or that have
not yet been made available for issuance.
In depth
7
Questions?
Authored by:
PwC clients who have questions about this
In depth should contact their engagement
partner. Engagement teams who have
questions should contact the Financial
Instruments team in the National
Professional Services Group (1-973-2367803).
John Althoff
Partner
Phone: 1-973-236-7021
Chip Currie
Partner
Phone: 1-973-236-5331
Michael Kelly
Senior Manager
Phone: 1-973-236-7862
Jeffrey Joseph
Senior Manager
Phone: 1-973-236-4055
© 2016 PricewaterhouseCoopers LLP, a Delaware limited liability partnership. All rights reserved. PwC refers to the United States member firm, and may sometimes refer to the
PwC network. Each member firm is a separate legal entity. Please see www.pwc.com/structure for further details. This content is for general information purposes only, and should
not be used as a substitute for consultation with professional advisors. To access additional content on financial reporting issues, visit www.cfodirect.pwc.com, PwC’s online
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