LEASES WHERE ARE WE? Steve Rathjen

LEASES WHERE ARE WE? Steve Rathjen 267 256-3110 srathjen@kpmg.com

Agenda Project status Lease definition and classification Lessee accounting Lessor accounting Presentation, disclosures, and transition Summary of key differences between the FASB and IASB proposals 1

Project Status

Project Status* Objectives: Require lessees to recognize all leases on-balance sheet Eliminate arbitrary accounting distinctions for transactions that are economically similar Reduce complexity in lease accounting Develop converged lease accounting requirements Project added to Boards agendas First Exposure Draft Issued Discussion Paper Issued Second Exposure Draft Issued Final standard expected Earliest likely effective date? JULY 2006 MARCH 2009 AUGUST 2010 MAY 2013 H2 2015 JANUARY 2018 * This presentation reflects the Boards decisions through February 28, 2015 3

Lease Definition and Classification

Lease Definition A contract that conveys the right to use an asset (the underlying asset) for a period of time in exchange for consideration. Definition focuses on control over the use of an identified asset. Contracts that meet the definition of a lease: Within scope Leases of assets Long leases of land Sale-leasebacks Subleases In-substance purchases / sales Leases of inventory Scope with exceptions Short-term leases (lease term 12 months) Small-ticket leases (IASB only) Outside scope Leases of: Intangibles (other than ROU assets) Natural resources and exploration Biological assets 5

Lease Definition (Continued) Asset is physically distinct applies to distinct portions but not generic capacity, and Identified asset Supplier does not have a substantive right to substitute another asset No practical ability to substitute, or Benefits from substitution will not exceed the costs Customer has the right to Control over use Direct the use of the asset, and Obtain substantially all of the economic benefits from directing the use of the asset 6

Lease Definition Right to Direct Use Customer rights Supplier protective rights Right to direct (including the right to change) how and for what purpose the asset is used throughout the period of use Contractual provisions designed to protect supplier s interest in the asset, its personnel, or ensure compliance with laws and regulations Specify maximum amount of use or when customer can use Approve a change in how or for what purpose asset is used Require customer to follow prudent operating practices Do not, in isolation, prevent customer from having the right to direct the use of the asset 7

Lease Definition Shared Right to Direct Use Customer has the right to operate the asset or direct others to operate it as customer wishes Tiebreakers when customer and supplier share right to direct use Supplier has no right to change customer s operating instructions Customer designed the asset or caused it to be designed in a way that predetermines How and for what purpose the asset will be used How the asset will be operated Customer s right to specify output Customer s right to specify quantity and type of goods or services provided by the asset is not, by itself, considered the right to direct the use of the asset 8

Exemptions and Practical Expedients Short-term Leases with lease term of 12 months or less may apply current operating lease accounting Still subject to qualitative and quantitative disclosures Small-ticket (IASB only) Exemption for leases that are individually small in nature, even if material in aggregate No clear definition of small, but intended to capture items such as office furniture and certain IT equipment Leases would be accounted for off-balance sheet under IFRS, but on-balance sheet under U.S. GAAP Portfolio-level Aspects of the proposals may be applied at a portfolio-level (e.g., determination of discount rate or lease term) Must be a reasonable expectation approach is not materially different than applying to individual leases 9

Example 1: Lease Definition XA Planes, Inc. enters into a 5-year arrangement that involves the storage of parts used in kit planes that it designs to be built as experimental aircraft The supplier maintains 25 identical climate-controlled storage warehouses that it uses to provide storage services for multiple customers XA has agreed that the supplier may store XA s parts in any one of the warehouses maintained by supplier at supplier s location Would this contract meet the proposed definition of a lease? 10

Example 1A: Lease Definition Assume the previous example is modified so that the supplier is required to store XA s parts in 5 specified storage warehouses The supplier does not have the right to substitute an equivalent storage warehouse for any of those provided to XA at any time XA s contract includes a list of parts agreed on by XA and the supplier that XA may store in the warehouses; XA is not permitted to change the parts list or use the warehouses for purposes other than storing the parts on its original list during the 5- year term XA has no right to operate the warehouses and did not design them Would this contract meet the proposed definition of a lease? 11

Example 1B: Lease Definition Assume the previous example is modified so that the XA has the right to change the parts that it stores in the warehouses during the 5-year term The supplier has the right to approve any change in use of the warehouses for purposes other than storage Would this contract meet the proposed definition of a lease? 12

Agreements with Lease and Non-Lease Components When there is an observable standalone price for each component When there is not an observable standalone price for some or all components Taxes and insurance on the property Accounting policy election by class of underlying asset Lessee Separate and allocate based on relative standalone price of components maximize the use of observable information Lessor Always separate and allocate using the revenue recognition standard s guidance (i.e., on a relative selling price basis) Activities (or costs of the lessor) that do not transfer a good or service to the lessee are not components in a contract Account for lease and non-lease components together as a single lease component 13

Example 2: Lease and Non-Lease Components XA leases a printer used to print full-scale aircraft plans developed using computer-aided design (CAD plans) The lease is for a term of 5 years and includes mandatory maintenance services provided by the lessor The lessor obtains its own insurance for the printer Annual payments are $2,000 in advance and the contract states that $300 of that amount is for the maintenance portion and $50 is for the insurance portion XA is able to determine that similar maintenance services are offered by third parties for $400 per year, and insurance is offered by third parties for $50 per year XA is unable to find an observable standalone rental amount for a similar printer that can print CAD plans because none are leased without related maintenance services provided by the lessor What portion of the annual payment is attributable to the lease component of the arrangement under the Boards proposals? a. $2,000 b. $1,600 ($2,000 - $400) c. $1,650 ($2,000 - $300 - $50) 14

Lease Term Non-cancelable period Optional renewal periods if lessee reasonably certain to exercise Lease Term Periods after optional termination date if lessee reasonably certain not to exercise 15

Example 3: Lease Term XA enters into a lease of a 3-year-old machine to be used in manufacturing parts for a type of plane that it expects will remain popular with consumers until it completes development and testing of an improved model in approximately 10 years The cost to install the machine in XA s manufacturing facility is not significant The non-cancelable term of XA s manufacturing facility lease ends in 14 years, and XA has an option to renew that lease for another 8 years XA does not expect to be able to use the machine in its manufacturing process for other types of planes without significant modifications Other information re: the lease of the machine is as follows: Non-cancelable lease term Optional 1-year renewal periods (rents approx. fair value) 12 Total economic life of machine 10 years 25 years What is the lease term under the Boards proposals? 16

Example 3A: Lease Term Assume the previous example is modified so that XA and the lessor each have the right to terminate the lease without a penalty on each anniversary of the lease commencement date What is the lease term under the Boards proposals? 17

Lease Payments PV of future lease payments over lease term includes: Fixed payments RV guarantees Termination penalties Purchase options Variable lease payments (VLPs) Discount rate Exercise price of purchase options included if lessee is reasonably certain to exercise VLPs included only if based on a rate or index, or in-substance fixed Residual value guarantees (RVGs): Lessee includes amount expected to be payable Lessor excludes unless represent lease payments structured as RVGs Nonpublic business entities may make an accounting policy election to use a risk-free discount rate (FASB only) 18

Example 4: Lease Payments Based on the facts of Example 3, XA concludes that the lease term is 10 years The lease payments are adjusted annually in arrears based on the change in CPI over the previous 12 months; the annual change in CPI for the period ending at lease commencement is 1.5%. Other information re: the payments for the lease is as follows: 1. Present value of lease payments (commencement rate) for 10 years $16,560 2. Present value of lease payments (with annual 1.5% escalation) for 10 years $17,885 3. Purchase option strike price at end of 10 years $10,000 4. Present value of purchase option strike price $ 6,110 5. Guaranteed (expected) residual value at end of 10 years $10,500 6. Present value of guaranteed residual value $ 6,415 What is the present value of the lease payments under the Boards proposals? a. $22,670 (#1 + #4) b. $22,975 (#1 + #6) c. $16,560 (#1) d. $17,885 (#2) 19

Example 5: In-Substance Fixed Payments Based on Use Assume the previous example is modified so that XA is required to pay contingent rent of $1 for each hour in excess of 1,000 hours per year that it operates the machine XA would need to operate the machine a minimum of 1,500 hours per year for the next 5 years to fill existing orders for planes that require the use of the machine 1. Present value of lease payments at 1,000 hours of use per year $16,560 2. Present value of lease payments at 1,500 hours of use per year $20,415 3. Present value of lease payments at 2,000 hours of use per year $24,265 4. Present value of lease payments at 2,500 hours of use per year $28,115 5. Present value of lease payments at 3,000 hours of use per year $31,970 What is the present value of the lease payments under the Boards proposals? a. $16,560 b. $20,415 c. $24,265 d. $28,115 e. $31,970 20

Example 5A: In-Substance Fixed Payments Based on an Index Assume Example 4 is modified so that XA s lease payments increase by 1% annually for every 0.1% increase in CPI from the prior year (resulting in a leverage factor of 10 times the change in CPI), limited to a maximum increase of 1.5% per year Once lease payments increase, they cannot decrease according to the lease s provisions The CPI increase has exceeded 1% in each of the previous 20 years 1. Present value of lease payments at commencement rate $16,560 2. Present value of lease payments at 1% increase per year $17,255 3. Present value of lease payments at 1.5% increase per year $17,620 What is the present value of the lease payments under the Boards proposals? a. $16,560 b. $17,255 c. $17,620 21

Lease Classification Test Ownership transfers at end of lease? No Yes Bargain purchase option? No Yes Type A Transfer substantially all risk and rewards of ownership? No Yes Type B Assessment criteria similar to current IAS 17 classification test Lease classification test is not applicable for lessees applying IFRS 22

Example 6: Lease Classification The key facts in Examples 3 and 4 and additional facts that affect the classification of XA s lease of the manufacturing machine are summarized below: Lease term Remaining economic life of machine at lease commencement 10 years 22 years Present value of lease payments $16,560 Fair value of machine $22,975 Purchase option strike price at end of 10 years (declines by 1/12 each year thereafter) $10,000 Guaranteed (expected) residual value at end of 10 years $10,500 What is XA s classification of the lease under the FASB proposals? 23

Example 6A: Lease Classification upon Change in Circumstances Assume that two years after entering into the machine lease, the FAA reduces the permissible gross weight of aircraft with an experimental aircraft type rating Because of the new FAA weight restriction, the improved aircraft that was under development by XA is no longer expected to be a viable project as it will not qualify for an experimental aircraft type rating The estimated residual value of the machine significantly increases as a result of the new FAA restriction XA exercises the first of its one-year renewal options What is the effect of these developments on XA s classification of the lease under the FASB proposals? 24

Example 7: Lease Classification Land and Building Assume XA leases its manufacturing facility, which includes land and a building. Information regarding the lease is as follows: Non-cancellable lease term Optional renewal period (rents approx. fair value) Remaining economic life of building at lease commencement 25 years 10 years 35 years Present value of lease payments $1,457,000 Present value of payments excluding carrying cost of land at lessee IBR $ 899,000 Fair value of land $ 750,000 Fair value of building $1,000,000 No renewal or purchase option / title transfer in lease agreement What is the classification of the land lease component under the FASB proposals? What is the classification of the building lease component under the FASB proposals? 25

Lessee Accounting

Lessees Recognition Lessor Right to use underlying asset Lessee Lease payments ROU asset Right to use underlying asset during lease term Lease liability Obligation to make future lease payments 27

Lease Liability Initial Measurement Lease liability PV of unpaid lease payments 28

Lease Liability Subsequent Measurement and Reassessments Amortized cost using the effective interest method; no fair value option Changes in carrying amount of lease liability resulting from: Reassessment of lease payments due to increase in lessee s right-of-use Reassessment of lease payments due to decrease in lessee s right-of-use Adjust ROU asset Recognize in P&L Discount rate is revised only when the reassessment relates to whether a lease term or purchase option is reasonably certain to be exercised 29

ROU Asset Initial and Subsequent Measurement Initially measured as the sum of: Lease liability Initial direct costs* Prepaid lease payments Lease incentives received * Only incremental costs to obtain the lease qualify no allocation of internal fixed costs permitted. Subsequent measurement: Type A Leases Amortized, generally on a straight-line basis, over shorter of lease term or economic life of ROU asset Together with interest expense results in a front-loaded pattern of total expense ASC 360 impairment testing Type B Leases (FASB only) Amortized as a plug amount to produce straight-line total expense when combined with interest on lease liability Not amortized when straight-line total expense would be less than interest on lease liability ASC 360 impairment testing 30

Example 8: Lessee Initial Measurement of Lease Liability Expanding on the facts from previous examples, assume the following with respect to XA s lease of its manufacturing facility: 1. Present value of lease payments $1,457,000 2. Prepaid rent $ 99,000 3. Lease incentives received from lessor $ 50,000 4. Third-party commissions incurred upon obtaining the lease $ 44,000 5. Third-party brokerage fees incurred to negotiate the lease $ 15,000 What is the amount of the lease liability at lease commencement? a. $1,457,000 (#1) b. $1,358,000 (#1 - #2) c. $1,408,000 (#1 - #2 + #3) d. $1,516,000 (#1 + #4 + #5) 31

Example 9: Lessee Initial Measurement of ROU Asset Continuing with the facts from the previous example: 1. Present value of lease payments $1,457,000 2. Prepaid rent $ 99,000 3. Lease incentives received from lessor $ 50,000 4. Third-party commissions incurred upon obtaining the lease $ 44,000 5. Third-party brokerage fees incurred to negotiate the lease $ 15,000 What is the amount of the ROU asset at lease commencement? a. $1,408,000 (#1 - #2 + #3) b. $1,501,000 (#1 + #4) c. $1,516,000 (#1 + #4 + #5) 32

Lease Payments Reassessments (Lessees only) Reassessment Triggers Construction of significant leasehold improvements Making significant modifications or customizations of the underlying asset Subleasing the underlying asset for a period beyond the exercise date of a renewal option in the lease Change in variable lease payments (VLPs) based on an index or rate (IASB only) 33

Reassessment of VLPs Based on an Index or Rate Boards Decisions FASB: Reassess impact of VLPs based on an index or rate on measurement of lease liability and ROU asset only when there is a reassessment for another reason (e.g., lease term reassessment) IASB: Reassess impact of VLPs based on an index or rate on measurement of lease liability and ROU asset whenever a change in index or rate changes the contractual cash flows of the lease Effect Lease liabilities will often differ under U.S. GAAP and IFRS The longer the lease term the greater the differences Multi-national entities may need to maintain multiple lease tracking schedules Will increase income statement differences 34

Lease Modifications Lessees Does the modification convey an additional ROU to the lessee? No Yes Does the modification decrease the lessee s ROU? No Adjust the lease liability and record an equal and offsetting change in the ROU asset Is the change in payments commensurate with the standalone price of the additional ROU? No Yes Yes Account for the additional ROU as a separate, additional lease Account for the modification as a full, or partial early termination of the lease with an adjustment of the ROU asset and a P&L gain or loss 35

Example 10: Lessee Reassessment of Indexed Payments Expanding on the facts from Examples 3 and 4, assume that CPI changes by 1.5% in the first year of XA s manufacturing machine lease resulting in the following information with respect to the remaining lease payments under the lease: 1. Present value using original payment and discount rate $15,250 2. Present value using original payment and end of year 1 discount rate $15,280 3. Present value using end of year 1 payment and original discount rate $15,480 4. Present value using end of year 1 payment and discount rate $15,510 What is the change in the lease liability (if any) at the end of the first year of the lease under the FASB proposals? What about the IASB proposals? a. $0 (#1 - #1) b. $30 (#2 - #1) c. $230 (#3 - #1) d. $260 (#4 - #1) 36

Example 11: Lessee Reassessment Renewal Options Assume the same facts as those in Example 6A except that XA does not actually exercise the first of its renewal options, although renewal is now reasonably certain. Information about remaining lease payments for XA s lease at the end of the second year of the lease is as follows: 1. Present value using 8-year remaining term and original discount rate $13,870 2. Present value using 8-year remaining term and end-of-year-2 discount rate $13,925 3. Present value using 9-year remaining term and original discount rate $15,250 4. Present value using 9-year remaining term and end-of-year-2 discount rate $15,315 What is the change in the lease liability (if any) at the end of the second year of the lease under the Boards proposals? a. $0 (#1 - #1) b. $55 (#2 - #1) c. $1,380 (#3 - #1) d. $1,445 (#4 - #1) 37

Example 11A: Lessee Reassessment Renewal Options (Continued) Assume the same facts as those in the previous example except that XA reconfigures the layout of its manufacturing facility so that the leased machine is more centrally located. In addition XA repurposes the space that had been dedicated to developing and testing the prototype of the improved aircraft it was designing before the FAA changed the weight restrictions on experimental aircraft. Information about remaining lease payments for XA s lease at the end of the second year of the lease is as follows: 1. Present value using 8-year remaining term and original discount rate $13,870 2. Present value using 8-year remaining term and end-of-year-2 discount rate $13,925 3. Present value using 9-year remaining term and original discount rate $15,250 4. Present value using 9-year remaining term and end-of-year-2 discount rate $15,315 What is the change in the lease liability (if any) at the end of the second year of the lease under the Boards proposals? a. $0 (#1 - #1) b. $55 (#2 - #1) c. $1,380 (#3 - #1) d. $1,445 (#4 - #1) 38

Lessor Accounting

Lessors Type A Leases Lessor Type A Model Right to use underlying asset Lessee Lease payments Lease receivable Right to receive future lease payments Residual asset Right to return of underlying asset at end of lease term Up-front profit recognized (if any) includes profit related to residual interest The lessor s lease receivable is amortized on the effective interest method Interest income is recognized on both the residual asset and the lease receivable (i.e., the residual asset is accreted) 40

Lessors Type B Leases Lessor Type B Model Right to use underlying asset Lessee Lease payments Underlying asset No derecognition of underlying asset Lease income recognized generally on a straight-line basis Underlying asset remains on the lessor s balance sheet and continues to be depreciated 41

Lease Modifications Lessors Does the modification convey an additional ROU to the lessee? No Yes Is the change in payments commensurate with the standalone price of the additional ROU? No Was the original lease classified as a Type A lease? Yes No Account for the modified lease as a new lease prepaid or accrued rent considered payments for modified lease Yes Account for the additional ROU as a separate, additional lease Apply financial instruments guidance in U.S. GAAP or IFRS as applicable to determine accounting for modification 42

Type A Leases PV of unpaid lease payments* Net investment in lease Residual asset (PV of estimated future residual value) * Initial direct costs (only incremental costs to obtain the lease qualify no allocation of internal fixed costs permitted) are included in determining the lessor s implicit rate and in the PV of unpaid lease payments when the lease does not give rise to up-front profit. Initial direct costs are recognized as an expense at lease commencement (excluded in determining the lessor s implicit rate and from the PV of unpaid lease payments) if the lease gives rise to up-front profit. Profit on lease commencement: IASB: Always recognize up-front profit when the fair value of underlying asset exceeds its carrying amount FASB: Profit deferred when Type A classification is solely the result of involvement by a third party (e.g., a RVG) Deferred profit is recognized over the lease term to produce a constant periodic rate of return when combined with interest income 43

Example 14: Type A Lease Illustration Big Cap, Inc. leases a forklift to XA for 5 years. Big Cap concludes the lease should be classified as a Type A lease. Lease term Remaining economic life of forklift (equipment) 5 years 6 years Annual payments in advance $11,000 Fair value of leased asset $50,000 Carrying amount of leased asset $40,000 Lessor s implicit rate 8.878% Present value of lease payments $35,732 Estimated future residual value at end of year 5 $ 5,000 Present value of estimated future residual $ 3,268 Initial Direct Costs $ 2,500 44

Example 14: Type A Lease Illustration (Continued) Net investment in lease components: Lease receivable $ 35,732 Residual asset 3,268 Net investment in lease $ 39,000 Fact pattern Estimated future residual value $ 5,000 PV of estimated future residual $ 3,268 Fair value of leased asset $50,000 Carrying amount of leased asset $40,000 Present value of lease payments $35,732 Calculation of upfront profit: Consideration received ($11,000 + $39,000) $ 50,000 Initial direct costs of lease (2,500) Carrying amount of leased asset (40,000) Upfront profit $ 7,500 45

Example 14: Type A Lease Illustration (Continued) Big Cap, makes the following entries to recognize the lease of the forklift to XA: Account Debit Credit Cash (for prepaid rent) 11,000 Lease receivable 35,732 Residual asset 3,268 Cash (for initial direct costs) 2,500 PP&E (forklift) 40,000 Gain 7,500 46

Operating Lease Model (Type B Leases) Financial Position Profit or Loss Lessor does not recognize a financial asset Underlying asset remains on lessor's balance sheet Lease income is recognized generally on a straight-line basis No interest income recognition Lessor total lease income may differ from lessee total lease expense under straight-line ROU model if differing assumptions about lease term, purchase options, etc. Lessor's recognized underlying asset (not a financial asset) lessee s recognized financial liability 47

Presentation, Disclosures, and Transition

Lessee Presentation Type A Leases Statement FASB IASB Balance Sheet Present Type A ROU assets and lease liabilities either as separate line items on the balance sheet or disclose separately in the notes to the financial statements If not separately presented on the balance sheet: Present Type A ROU assets on the balance sheet as if the underlying asset were owned Disclose in the notes the line items on the balance sheet in which Type A ROU assets and lease liabilities are included and their amounts Income Present amortization of Type A ROU assets separately from interest Statement Statement of Cash Flows expense on Type A lease liabilities Financing activities principal payments on Type A lease liabilities Operating activities: Variable lease payments and payments for short-term leases Interest payments on Type A lease liabilities Operating or financing activities interest payments on Type A lease liabilities (IAS 7 accounting policy choice) 49

Lessee Presentation Type B Leases Statement Balance Sheet Income Statement Statement of Cash Flows FASB Only Present Type B ROU assets and lease liabilities either as separate line items on the balance sheet or disclose separately in the notes to the financial statements Do not include Type B ROU assets and lease liabilities in the same line items as Type A ROU assets and lease liabilities If not separately presented on the balance sheet disclose in the notes the line items on the balance sheet in which Type B ROU assets and lease liabilities are included and their amounts Present amortization of Type B ROU assets and interest on Type B lease liabilities as a single lease expense Operating activities all Type B lease payments 50

Presentation Lessors Lease Type Type A Type B Balance Sheet Lease assets presented as a single caption in the balance sheet Separate presentation of receivable and residual on the face of balance sheet or in the notes Continue to recognize underlying asset in the balance sheet Income Statement Lease income separately presented in the SCI or in the notes Accretion of gross residual asset presented as interest income Gross or net presentation of profit (loss) at lease commencement depending on lessor s business model 1 Total lease income recorded in a single line item caption No recognition of interest income Statement of Cash Flows Operating activities all cash inflows 1 Leases classified as Type A solely as a result of involvement by a third party other than the lessee (e.g., third party residual value guarantees) are precluded from recognizing selling profit at lease commencement. 51

Disclosures Lessors Information about lease contracts and significant assumptions / judgments Table of all lease income received during the period, including from VLPs Maturity analysis of gross undiscounted future lease payments segregated by lease classification for each of the first 5 years and a total for thereafter. For Type A leases, amounts must be reconciled to the balance of lease receivables. General PP&E disclosures for assets under Type B leases by significant class of underlying asset separate from PP&E disclosures for other owned assets Information about how the risks associated with the residual value of leased assets are managed Explanation of significant changes in the residual asset (U.S. GAAP) / net investment (IFRS) for Type A leases 52

Disclosures Lessees Lessee Disclosure Objective: Enable financial statement users to understand the amount, timing and uncertainty of cash flows arising from leases. Lessees would exercise judgment to determine the appropriate level at which to aggregate, or disaggregate, disclosures. IASB will require all lessee disclosures to be presented in a single note or separate section in the financial statements. Topic FASB IASB Qualitative Disclosures Information about nature of leases (and subleases) Information about leases that have not yet commenced, but that create significant rights and obligations for lessees Information about significant judgments and assumptions made in accounting for leases Main terms and conditions of any saleleaseback transactions Whether an accounting policy election was made for the short-term lease exemption Will not include a list of qualitative disclosure requirements Lessees would be required to disclose other information in addition to the quantitative disclosures in sufficient detail to satisfy the lessee disclosure objective 53

Disclosures Lessees (Continued) Topic FASB IASB Quantitative Disclosures Amortization of ROU assets and interest on lease liabilities - For Type A leases only - Interest on lease liabilities would include capitalized interest - Show amortization by class of underlying asset N/A Additions to ROU assets Short-term lease expense (when lease term > 30 days) Variable lease expense Sublease income Gains (losses) on sale-leaseback transactions Type B lease expense (including capitalized costs) N/A Carrying amount of ROU asset by class of underlying asset N/A Small-ticket lease expense Maturity analysis of lease liabilities (for each of the first 5 years after the balance sheet date and in total thereafter), including reconciliation of undiscounted cash flows to lease liabilities (as presented in the balance sheet) Maturity analysis of lease liabilities in accordance with IFRS 7, separate from maturity analysis for other financial liabilities 54

Disclosures Lessees (Continued) Topic FASB IASB Quantitative Disclosures (continued) Cash paid for amounts included in measurement of lease liabilities, segregated between Type A and Type B leases and between operating and financing cash flows Supplemental noncash information on lease liabilities exchanged for ROU assets separately for Type A and Type B leases Total cash outflows for leases Weighted-average remaining lease term, presented separately by Type A and Type B leases Weighted-average discount rate for Type B leases as of the balance sheet date No specific presentation requirements for lessees quantitative disclosures, but final standard will include an example presenting quantitative disclosures in a tabular format N/A Present quantitative disclosures in a tabular format, unless another format is more appropriate 55

Transition FASB Initial application the first day of the earliest comparative period presented Lessees & Lessors Apply a modified retrospective transition approach: Restate all comparative periods presented No revisions to the accounting for leases that expired prior to date of initial application Full retrospective adoption would be prohibited Permitted to elect specified transition reliefs as a package (i.e., all or none) for all leases Companies that are both a lessee and lessor would apply all or none of the specified reliefs to all its leases Permitted to use hindsight in evaluating the likelihood of exercise of lease renewal and purchase options for existing leases Initial application the first day of the annual reporting period in which the requirements of the new standard are applied Lessees: Option to apply a fully retrospective transition approach Option to apply a modified retrospective transition approach: Lessors IASB No restatement of comparative information Recognize cumulative effect adjustment to beginning retained earnings upon initial application Continue to apply existing accounting for any ongoing leases at date of initial application, except for intermediate lessors in sublease 56

Summary of Key Differences Between the FASB and IASB Proposals

Key Differences Between the FASB and IASB Proposals Topic FASB IASB Lessee accounting Lessor accounting Dual lease accounting model (Type A and Type B) Lease classification test based on current IAS 17 classification criteria Type B leases treated as executory contract in P&L Most cash flows presented as operating activities Recognition of selling profit spread over lease term if the lease does not qualify as Type A without involvement by third parties Single lease accounting model No lease classification test All leases treated as purchase of ROU asset on a financed basis (i.e. all leases are Type A) Most cash flows presented as financing activities No restriction of recognition of selling profit for Type A leases 58

Key Differences Between the FASB and IASB Proposals (Continued) Topic FASB IASB Small-ticket leases Lessee reassessment of VLPs No exemption for small leases Exemption for small leases, even if material in aggregate Reassessment only required when the lease payments are remeasured for other reasons Subleases Classification of sublease based on the underlying asset Related party transactions Account for related party leases based on legally enforceable terms and conditions, even if they differ from the substance of the arrangement Required to reassess when there is a contractual change and when the lease payments are remeasured for other reasons Classification of sublease based on ROU asset N/A, not addressed in its proposals 59

Key Differences Between the FASB and IASB Proposals (Continued) Topic FASB IASB Saleleaseback transactions If the leaseback is a Type A lease, then no sale is recognized Gain on sale (with market terms) based on the entire underlying asset A repurchase option would not preclude sale recognition if the strike price is fair value upon exercise and the underlying asset is readily available, nonspecialized equipment N/A, single model approach for lessee accounting Gain on sale (with market terms) restricted to the residual interest in the underlying asset Any substantive repurchase option would preclude sale recognition 60

Key Differences Between the FASB and IASB Proposals (Continued) Topic FASB IASB Lessee Disclosures List of qualitative disclosure requirements No list of qualitative disclosure requirements Disclose information in sufficient detail to satisfy the lessee disclosure objective Quantitative disclosure requirements generally segregated by Type A and Type B leases No specific presentation requirement for lessees quantitative disclosures Quantitative disclosure requirements link to other IFRS requirements in some cases Present quantitative disclosures in a tabular format, unless another format is more appropriate 61

Key Differences Between the FASB and IASB Proposals (Continued) Topic FASB IASB Transition Lessees and lessors: Apply a modified retrospective transition approach Full retrospective transition approach prohibited Lessees: Option to apply either a fully retrospective or modified retrospective transition approach Lessors: Apply existing accounting for any ongoing leases at date of initial application, except for intermediate lessors in sublease 62

What Questions Do You Have? 63

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