Measuring Lease Liabilities EQUIPMENT LEASING AND FINANCE ASSOCIATION

Measuring Lease Liabilities EQUIPMENT LEASING AND FINANCE ASSOCIATION

Presenters Kerrie Cadugan, Executive Director, EY Barbara Galaini, Chief Accounting Officer of the Americas, Avolon

The views expressed by presenter(s) are not necessarily those of EY or Avolon. These slides are for educational purposes only and are not intended, and should not be relied upon, as accounting advice.

Leased asset Lessor Lease consideration Lessee Lease classification Lease classification Sales-type lease Direct financing lease Operating lease Finance lease Operating lease Lessor: similar to current GAAP with some changes Certain concepts are aligned with the revenue recognition standard Changes to what would be considered initial direct costs Leveraged lease accounting is eliminated for new leases after the effective date Right-of-use asset Lease liability Balance sheet Income statement Finance lease generally front-loaded interest and amortization expense Operating lease generally straight-line lease expense

Lease and non-lease components Many contracts contain a lease coupled with an agreement to purchase or sell other goods or services (non-lease components) Non-lease components (e.g., maintenance activities, including common area maintenance) are identified and accounted for separately from the lease component in accordance with other US GAAP (i.e., as executory arrangements by lessees or as contracts subject to ASC 606, Revenue from Contracts with Customers, by lessors) As a practical expedient, lessees can make an accounting policy election (by class of underlying asset) to account for each separate lease component of a contract and its associated non-lease component(s) as a single lease component Lessees allocate consideration in the contract to the lease and non-lease components (unless the practical expedient is elected) on a relative standalone price basis

Lease term Any noncancelable periods Lease term Periods covered by an option to extend the lease if the lessee is reasonably certain to exercise that option Periods covered by an option to terminate the lease if the lessee is reasonably certain not to exercise that option Periods covered by an option to extend (or not terminate) the lease in which the exercise of the option is controlled by the lessor The Financial Accounting Standards Board said that reasonably certain has the same meaning as reasonably assured in ASC 840 Reasonably certain is generally interpreted as a high threshold Purchase options should be assessed in the same way as options to extend the lease term or terminate the lease

Lease payments Lease payments should be consistent with the lease term Lease payments Fixed (including insubstance fixed) payments, less any lease incentives paid or payable to the lessee Variable payments based on an index or rate Exercise price of a purchase option* Payments for penalties for terminating the lease** Amounts it is probable that the lessee will owe under residual value guarantees (lessees only) * Include only if reasonably certain of exercise ** Include only if the lease term reflects the lessee exercising an option to terminate the lease Lease payments also include fees paid by the lessee to the owners of a specialpurpose entity for structuring a transaction However, such fees are excluded from the fair value of the underlying asset for purposes of the leases classification test

Discount rates * When performing a sales-type lease classification test only, a lessor excludes initial direct costs from the calculation of the rate implicit Lessees in the use lease if their underlying incremental asset s fair borrowing value differs from rate its carrying when value the at rate lease commencement implicit in the lease cannot be readily determined Lessees that are not PBEs are permitted to make an accounting policy election (for all leases) to use a risk-free rate determined using a period comparable with the lease term

Leases denominated in a Foreign Currency The lease liability is a monetary liability. In accordance with Subtopic 830-10 on foreign currency matters, when accounting for a lease that is denominated in a foreign currency, if remeasurement into the lessee s functional currency is required, the lease liability is remeasured using the current exchange rate

Transition Modified retrospective transition Lessees & lessors can elect to apply a package of practical expedients that allow them not to reassess: Whether contracts are or contain leases Lease classification Whether IDCs qualify for capitalization Apply to all expired and existing leases Package must be applied in its entirety Also permitted to make an election for all existing leases to use hindsight when determining the lease term