EisnerAmper Blog

May 16, 2013

By:  Aaron S. Kaiser  

On May 16, the FASB issued for comment  what is expected to be the final version of the new lease accounting standards.  Comments are due 9/13/13.

Here are the highlights of divergence from current GAAP:

For non-property (i.e. equipment leases) this is the proposed lessee accounting: 

1. Recognize a “right to use asset” on the balance sheet (present value of lease payments) together with a liability for the present value of the payments to be made under the lease.

2. Unwind that asset and liability over the lease term by amortizing the asset and recognizing interest expense/repayment of principal as lease payments are made.  The interest and amortization amounts are conceptually unlinked.

For most leases of real estate (meaning land and/or building) this is the lessee accounting: 

1. Recognize a “right to use asset” and a lease liability much the same way as on the equipment side.

2. Unwind that asset and liability in such a manner so that the aggregate of the amortization and interest expense will be equivalent to what presently constitutes the straight line result obtained under current operating lease rules.

For equipment lessor accounting, if the lease is expected to consume “more than an insignificant” portion of the economic benefit constituting the asset, the lessor would de-recognize the asset and substitute the (total of) the residual value and present value of the lease at inception, and record profit on the difference on Day 1-and amortize the unwinding of the receivable in part to interest income/principal as payments under the lease are received.

Real estate lessors almost always will recognize income on the straight-line basis over the lease term as in current practice.

Special rules (as in the most recent prior exposure draft) for transition will measure leases as of the earliest date a financial statement is presented and NOT as of the inception of the lease (thankfully!).

The board will set an effective date for these new requirements after consideration of the feedback received during the comment period.

Obviously there will be a lot of details to sort out. The good news is that most of them have already been exposed previously.

Stay tuned for our more detailed analysis shortly!
 

March 22, 2013

By Ross Dauman, CPA

Section 1.168(k)-1(c) of the Internal Revenue Code explains the statutory requirements for property to fall under the definition of qualified leasehold improvement property (QLIP).  In general, in order to qualify, the leasehold improvement must be made to an interior portion of a building occupied exclusively by the lessee (or sublesee), pursuant to a lease, and more than three years after the date the building was first placed in service. Property that meets these requirements through the end of 2013 receives beneficial tax treatment; the asset qualifies for 50% bonus depreciation in the first year and the remaining cost basis is depreciated over 15 years.

In a recent Chief Council Advice (CCA), there has been further clarification to the meaning of “interior” in regards to the requirements for property to be defined as QLIP.  In the case involving a retail tenant that installed HVAC units on the roof and on concrete pads adjacent to the building it leased, the IRS has concluded that the HVAC units will not qualify as QLIP since they are not in the “interior” of the tenant space. This conclusion mainly impacts heating, ventilation, and air conditioning units (HVAC) and their ability to accelerate depreciation.  The units are not eligible for first-year bonus deprecation and the cost recovery period is limited to 39 years, instead of 15 years.

 March 15, 2013

By Ed Opall, CPA 

After four year of deliberations, two exposure drafts and thousands of letters from industry and the accounting profession, the topic Revenue Recognition for Contracts with Customers has been accepted by both the FASB and IASB. 

The new standards will entail significant changes from the current standards, which have been in effect since 1981.  Public companies will have until 2017 and private companies will have until 2018 to implement the new standards.  Overall, the most recent amendments provided needed clarification on certain issues and established the transition dates and methods. The Construction Financial Management Association (CFMA) recently published “Revenue Recognition—It’s a Wrap!”  explaining the changes from the exposure draft issued in November 2011.  The final pronouncement is expected in the second quarter of 2013.