2005 ELA Accounting Conference

Transcription

1 2005 ELA Accounting Conference HOT TOPICS: LESSEE ISSUES Kimber Bascom Randy Green Bob Keyes KPMG Deloitte & Touche USBancorp

2 Agenda FSP FAS 13-b EITF Lessee Involvement in Asset Construction Real Estate Sale/Leasebacks FIN 46R Lease Inflators Lease Commencement Ownership of Improvements 2

3 FSP FAS 13-b Rent During Construction Applies to building and ground lease rental costs Rent is for the right to control and use an asset No distinction for construction period Rental costs during construction must be expensed Record in income from continuing operations Generally straight-line total rent Effective first period after September 15, 2005 Retrospective application permitted (not required) 3

4 EITF Addresses leasehold improvements Purchased after inception of operating lease, or Acquired in a business combination Amortization period should be lesser of Subsequently acquired improvements useful life Period that reflects reasonably assured renewals 4

5 EITF (continued) Reasonably assured determined in context of FAS 13 Bargain renewal, or Substantial penalty if renewal not exercised Renewal right must be in lease agreement Effective 6/30/05 on a prospective basis Early adoption allowed if F/S not yet issued 5

6 Lessee Involvement in Asset Construction Applicable Accounting Literature When Lessee is Involved in Asset Construction EITF EITF FAS 28/98 Pre-construction period before lessee enters into lease agreement Construction period after lessee enters into lease agreement Date that asset construction is complete and lease term begins 6

7 Land Preparation Costs EITF indicates that a lessee that commences construction activities must put construction in progress on balance sheet and evaluate any subsequent lease arrangement under FAS 98 Whether construction has commenced if lessee begins clearing land, building roads, etc. Evaluation of hard costs vs. soft costs under EITF Costs of preparing land for intended use vs. development costs 7

8 Soft Costs EITF and EITF both discuss whether soft costs incurred by the lessee cause the lessee to be considered the owner of the construction project How to determine whether the lessee is the owner of the construction project as a result of soft costs incurred Soft costs incurred by lessee during the pre-construction period before lessee enters into lease agreement Purchase options Inclusion of soft costs in total project costs and EITF implications 8

9 Real Estate Sale/Leasebacks FAS 98 applies to real estate, property improvements and integral equipment How to determine whether a leased asset is accounted for as real estate and within the scope of FAS 98 Identifying integral equipment Quantitative tests Qualitative considerations 9

10 Real Estate Sale/Leasebacks FAS 98 precludes sale accounting by a seller-lessee that has any continuing involvement with the property other than a normal leaseback How to evaluate the provisions of FAS 98 when the saleleaseback transaction involves multiple properties More than minor subleases Purchase options Nonrecourse loans to buyer-lessor Gain or loss on sale 10

11 Real Estate Sale/Leasebacks, Cont d. FAS 98 precludes sale accounting by a seller-lessee that has any continuing involvement with the property other than a normal leaseback How to evaluate constraints on the manner in which the buyerlessor is permitted to the use the property arising in a contract other than the sale-leaseback agreement (e.g., a ground lease) Underlying rationale for sale-leaseback accounting Restrictions that a lessor could reasonably be expected to place on a lessee 11

12 Real Estate Sale/Leasebacks, Cont d. FAS 98 precludes sale accounting by a seller-lessee that has any continuing involvement with the property other than a normal leaseback Impact of ground lease terms on FAS 98 analysis of building sale-leaseback Term of ground lease in relation to estimated economic life of building Above- or below-market ground rent rents 12

13 Real Estate Sale/Leasebacks, Cont d. FAS 98 precludes sale accounting by a seller-lessee that has any continuing involvement with the property other than a normal leaseback Implications of prepaid rent on FAS 98 analysis Seller-lessee precluded from making a nonrecourse loan to buyer-lessor or providing collateral to the buyer-lessor other than the property itself 13

14 Real Estate Sale/Leasebacks, Cont d. FAS 98 precludes sale accounting by a seller-lessee that has any continuing involvement with the property other than a normal leaseback Implications of a parent company s unsecured guarantee of a subsidiary seller-lessee s lease payments Seller-lessee precluded from providing additional collateral that reduces buyer-lessor s risk of loss Effect on seller-lessee s financial statements Effect on parent company s financial statements 14

15 Real Estate Sale/Leasebacks, Cont d. FAS 98 precludes sale accounting by a seller-lessee that has any continuing involvement with the property other than a normal leaseback Implications of letters of credit provided in connection with saleleaseback transactions Independent third-party guarantees of lease payments not considered continuing involvement by lessee under FAS 98 Uncollateralized letters of credit Collateralized letters of credit e.g., deposits maintained with LOC provider 15

16 Environmental Indemnifications During the construction period, indemnifications of any party other than the owner-lessor generally result in the lessee being deemed the owner of the project Consideration of environmental indemnifications to parties other than the owner-lessor Exception in Issue Indemnified parties Measurement of risk FIN 45 16

17 Environmental Indemnifications, Cont d. Traditional indemnities of the owner-lessor for the lessee s use of the property do not typically constitute a form of prohibited continuing involvement Consideration of environmental indemnifications when evaluating FAS 66 and 98 (i.e., sale-leaseback) Pre-existing environmental hazards Evaluation of substance (e.g., residual value guarantee) Degree of uncertainty FIN 45 Indemnified parties 17

18 FIN 46R FIN 46R requires the primary beneficiary of a VIE to consolidate the VIE and a lease contract creates a potential variable interest How to determine whether the lessee should (or should not) consolidate the lessor Lease terms that result in a variable interest Applicability of FIN 46R business scope exception Evaluating whether lease represents a silo within lessor Widely applied safe harbors vis-à-vis FIN 46R Evidence/analysis required to support conclusions 18

19 Lease Inflators FAS 13 and FAS 29 exclude contingent rentals from minimum lease payments used to determine lease classification Whether all lease inflators involving an index such as CPI represent contingent rentals Definition of contingent rentals What does an existing index mean when evaluating rentals indexed to changes in CPI Evaluating indexed rentals involving multiples and caps 19

20 Lease Commencement Lease Commencement (for accounting purposes) is not (explicitly) defined FTB 85-3 and rent holidays FAS 13 / Issue 01-8 and the right to use Proposed FSP FAS13-b 20

21 Ownership of Improvements The staff recognizes that evaluating when improvements should be recorded as assets of the lessor or assets of the lessee may require significant judgment and factors in making that evaluation are not the subject of this letter. Letter dated February 7, 2005 from the Chief Accountant of the SEC to the Center for Public Company Audit Firms 21

22 Ownership of Improvements Considerations FTB 88-1 Substantive indicators Other Pro-rata consolidation Revenue / expense recognition Consistency of application 22

23 2005 ELA Accounting Conference HOT TOPICS: LESSEE ISSUES Kimber Bascom Randy Green Bob Keyes KPMG Deloitte & Touche USBancorp