FASB Technical Bulletin No. 86-2

Transcription

1 FASB Technical Bulletin No FTB 86-2 Status Page Accounting for an Interest in the Residual Value of a Leased Asset: Acquired by a Third Party or Retained by a Lessor That Sells the Related Minimum Rental Payments December 1986 Financial Accounting Standards Board of the Financial Accounting Foundation 401 MERRITT 7, P.O. BOX 5116, NORWALK, CONNECTICUT

2 Copyright 1986 by Financial Accounting Standards Board. All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without the prior written permission of the Financial Accounting Standards Board. Page 2

3 FTB 86-2: Accounting for an Interest in the Residual Value of a Leased Asset: Acquired by a Third Party or Retained by a Lessor That Sells the Related Minimum Rental Payments References: FASB Statement No. 13, Accounting for Leases, paragraphs 17, 18, 42, and 99 FASB Concepts Statement No. 5, Recognition and Measurement in Financial Statements of Business Enterprises, paragraphs 83, 84(c), 84(d), and 84(f) FASB Statement No. 33, Financial Reporting and Changing Prices, paragraph 47 APB Opinion No. 10, Omnibus Opinion 1966, paragraph 7 1. How should an enterprise account for the acquisition from a lessor of the unconditional right to own and possess, at the end of the lease term, an asset subject to a lease? Also, how should an enterprise account for the acquisition of the right to receive all, or a portion, of the proceeds from the sale of a leased asset at the end of the lease term? 2. At the date the rights are acquired, both transactions involve a right to receive, at the end of the lease term, all, or a portion, of any future benefit to be derived from the leased asset and should be accounted for as the acquisition of an asset. (Hereinafter, both transactions are referred to as the acquisition of an interest in the residual value of a leased asset.) 3. How should an enterprise acquiring an interest in the residual value of a leased asset measure the cost of the acquisition? Page 3

4 4. An interest in the residual value of a leased asset should be recorded as an asset at the amount of cash disbursed, the fair value of other consideration given, and the present value of liabilities assumed at the date the right is acquired. The fair value of the interest in the residual value of the leased asset at the date of the agreement should be used to measure its cost if that fair value is more clearly evident than the fair value of assets surrendered, services rendered, or liabilities assumed. 5. A lessor recognizes increases in the residual value of a leased asset accounted for as a sales-type or direct financing lease to its estimated value at the end of the lease term. How should an enterprise acquiring an interest in the residual value of a leased asset account for that asset during the lease term? 6. An enterprise acquiring an interest in the residual value of any leased asset, irrespective of the classification of the related lease by the lessor, should not recognize increases to the asset's estimated value over the remaining term of the related lease, and the asset should be reported at no more than its acquisition cost until sale or disposition. If it is subsequently determined that the fair value of the residual value of a leased asset has declined below the carrying amount of the acquired interest and that decline is other than temporary, the asset should be written down to fair value, and the amount of the write-down should be recognized as a loss. That fair value becomes the asset's new carrying amount, and the asset should not be increased for any subsequent increase in its fair value prior to its sale or disposition. 7. Do the foregoing provisions apply to lease brokers? 8. Yes. An interest in the residual value of a leased asset acquired by a lease broker for cash, liabilities assumed, and the fair value of other consideration given, including services rendered, should be accounted for under the foregoing provisions. Page 4

5 9. If a lessor sells substantially all of the minimum rental payments associated with a sales-type, direct financing, or leveraged lease and retains an interest in the residual value of the leased asset, how should the lessor account for that asset over the remaining lease term? 10. A lessor retaining an interest in the residual value of the leased asset should not recognize increases in the value of the lease residual to its estimated value over the remaining lease term. The lessor should report any remaining interest thereafter at its carrying amount at the date of the sale of the lease payments. If it is subsequently determined that the fair value of the residual value of the leased asset has declined below the carrying amount of the interest retained and that decline is other than temporary, the asset should be written down to fair value, and the amount of the write-down should be recognized as a loss. That fair value becomes the asset's new carrying amount, and the asset should not be increased for any subsequent increase in its fair value prior to its sale or disposition. 11. If an interest in the residual value of a leased asset is guaranteed, does the guarantee change the nature of the asset or the accounting? 12. No. A guarantee does not change the nature of an interest in the residual value of a leased asset or its historical acquisition cost. Effective Date and Transition 13. The provisions of this Technical Bulletin are effective December 17, 1986 for transactions entered into on or after June 18, 1986, the date the conclusions of this Technical Bulletin were first discussed at a public Board meeting. Earlier application to transactions occurring in periods for which financial statements have not been issued is encouraged. Financial information for transactions entered into on or after June 18, 1986 that was reported differently than specified by this Technical Bulletin should be restated to conform to its provisions when the interim or annual financial statements containing that information are subsequently presented. Page 5

6 Appendix: BACKGROUND INFORMATION AND CONSIDERATION OF COMMENTS RECEIVED ON THE PROPOSED TECHNICAL BULLETIN Background Information 14. An enterprise can acquire an unconditional interest in a leased asset or a right to receive proceeds from the sale of a leased asset without also acquiring the related lease. For example, a lease broker may receive an interest in the residual value of a leased asset as a fee for services. An interest in the residual value of a leased asset can also be purchased directly from lessors. In addition, a lessor can sell the minimum rental payments associated with a lease and retain an interest in the residual value of the leased asset. 15. The accounting for an interest in the residual value of a leased asset has varied in practice. Some enterprises record the lease residual at its acquisition cost (or in the case of the lessor who retains an interest in the residual value of the leased asset, at its carrying amount at the date of the sale of the related lease) and carry it at that amount until ultimate disposition. Others increase the carrying amount of the lease residual to its estimated value over the remaining term of the related lease. An AICPA Issues Paper, "Accounting by Lease Brokers," issued on June 20, 1980, states in paragraph 72 that "if the lease broker records the present value of his share of the estimated residual value of the leased assets at the beginning of the initial lease term, he should subsequently accrete the value over the term of the lease using the interest method." (The term accrete is used in that document to refer to a method of systematically increasing the carrying amount of a lease residual to its estimated value at the end of the related lease term.) 16. This Technical Bulletin addresses the accounting by a lease broker for an interest in the residual value of a leased asset acquired in exchange for services rendered and prohibits a lease broker from recognizing increases in the asset's estimated value over the remaining term of the lease. In that respect, it differs from the AICPA Issues Paper, "Accounting by Lease Brokers." It does not address other areas of fee recognition by lease brokers, or any other provisions of that Issues Paper. Consideration of Comments Received on the Proposed Technical Bulletin 17. A proposed Technical Bulletin, Accounting for an Interest in the Residual Value of a Leased Asset Acquired by a Third Party or Retained by a Lessor That Sells the Related Minimum Rental Payments, was released for comment on September 25, Thirty-two letters of comment were received; the most significant comments are discussed in the following paragraphs. Page 6

7 18. Several respondents stated that the carrying amount of an acquired interest in the residual value of a leased asset should be increased to its estimated value and justify doing so by an analogy to paragraphs 17 and 18 of Statement 13, which require a lessor who enters into a sales-type or direct financing lease to recognize as income over the lease term the difference between the estimated residual value of the leased asset at the end of the lease term and its present value at the beginning of the lease term. However, sales-type and direct financing leases are financing transactions under Statement 13, and the estimated residual value of a leased asset is looked upon as the final payment, as stated in paragraph 99 of that Statement:...in the vast majority of leases, the estimated residual value is realized by a sale or re-lease of the property and, for that reason, the residual should be looked upon as a last payment similar to the minimum lease payments. In addition,... presentation of the estimated residual value as part of the lease investment rather than as part of property, plant, and equipment is necessary to portray the proper relationship between the gross investment in leases and the related unearned income, since a portion of the unearned income relates to the residual value. However, an analogy to the lessor's recognition of an increase in the residual value of a leased asset required in Statement 13 is not appropriate for an acquired interest in the residual value of a leased asset absent the related financing elements of the lease. Therefore, if substantially all of the related financing elements of a lease (the minimum rental payments) have been sold, any retained interest in the residual value of a leased asset cannot be looked upon as a final payment of the lease agreement. 19. Paragraph 83 of Concepts Statement 5 states, "...recognition [of revenues and gains] involves consideration of two factors, (a) being realized or realizable and (b) being earned...." Some respondents commented that an increase in the value of an interest in the residual value of a leased asset is being earned over time. However, an interest in the residual value of a leased asset is not realized and cannot be considered realizable until its ultimate sale or disposition. Concepts Statement 5 acknowledges that revenue is sometimes recognized when earned even though not readily realizable, for example, when a product is contracted for before production, when rights to use assets extend continuously over time, and when assets are exchanged for nonmonetary assets that are not readily convertible into cash (paragraphs 84(c), 84(d), and 84(f)). Since none of those examples apply, the recognition of revenue or gain from holding an interest in the residual value of a leased asset is not appropriate. 20. Some respondents asserted that, in substance, a guarantee of an interest in a lease residual that is required to be sold fixes contract terms and changes the nature of the asset to a monetary asset, making it appropriate to recognize increases to the expected value. A monetary asset is defined in paragraph 47 of Statement 33 as "money or a claim to receive a sum of money the amount of which is fixed or determinable without reference to future prices of specific goods or Page 7

8 services." While a guarantee limits the risk of not realizing the estimated value of the leased asset, it does not fix or determine the amount to be received by the acquirer at the end of the lease term because the acquirer of the lease residual may receive an amount that exceeds the guarantee. As a result, a guarantee does not change the nature of the asset to a monetary asset and, therefore, does not make it appropriate to recognize increases to its expected value. Rather, a guarantee is separate from the asset and is obtained to reduce the risk of not realizing the estimated value of the leased asset, similar to insurance. 21. Some respondents expressed concern that paragraph 10 of the proposed Technical Bulletin would prohibit lessors from increasing the carrying amount of an interest in the residual value of a leased asset if they remove lease receivables from their balance sheet and retain an interest in the residual value of a leased asset, either (a) through sale of the related lease receivable or (b) by offsetting the lease receivable with nonrecourse debt. Some respondents who offset nonrecourse debt with the related lease receivable used as collateral apparently view the transaction, in substance, as a sale. Paragraph 10, however, only addresses those transactions structured as a sale of the related lease receivable and is not intended to consider any circumstance in which nonrecourse debt is collateralized by a lease receivable. In that circumstance, recognizing increases in the carrying amount of an interest in the residual value of a leased asset is appropriate under Statement 13. However, paragraph 7 of Opinion 10 states: It is a general principle of accounting that the offsetting of assets and liabilities in the balance sheet is improper except where a right of setoff exists. Therefore, offsetting the lease receivable with nonrecourse debt is appropriate only in those circumstances in which a legal right of offset exists or when, at the inception of the lease, the lease meets all of the characteristics of paragraph 42 of Statement 13 and is appropriately classified as a leveraged lease. Otherwise, the guidance provided in paragraph 7 of Opinion 10 should be applied. The Financial Accounting Standards Board has authorized its staff to prepare FASB Technical Bulletins to provide guidance on certain financial accounting and reporting problems on a timely basis, pursuant to the procedures described in FASB Technical Bulletin No (Revised), Purpose and Scope of FASB Technical Bulletins and Procedures for Issuance. The provisions of Technical Bulletins need not be applied to immaterial items. Page 8