Surety Bond Quarterly - Winter 2014 - (Page 10)

Practical Insights: What You Need to Know lease accounting - a New standard is Coming On May 16, 2013, the Financial Accounting Standards Board (FASB) issued a proposed Accounting Standards Update, Leases (Topic 842): a revision of the 2010 proposed Accounting Standards Update, Leases (Topic 840). The public comment period ended on Sept. 13, 2013 and release of the final standard is anticipated for late BY GEHRIG COSGRAY 2015 or early 2016. Bond producers and construction contractors should be aware of the business impacts of the new standard. The core principle of the new standard is that an entity should recognize assets and liabilities arising from a lease. In many cases, the current standards do not require lease assets and lease liabilities to be recognized by lessees. It has been speculated that the effect of this standard will be to move in excess of a trillion dollars of off-balance sheet debt onto lessee balance sheets. The new standard will require a lessee to recognize assets and liabilities for leases with a maximum possible term of more than 12 months. A lessee would recognize a liability to make lease payments (the lease liability) and a right-of-use asset representing its right to use the leased asset (the underlying asset) for the lease term. The recognition, measurement, and presentation of expenses and cash flows arising from a lease by a lessee would depend on whether the lessee is expected to consume more than an insignificant portion of the economic benefits embedded in the underlying asset. For practical purposes, this assessment would often depend on the nature of the underlying asset. The standard contains new definitions for leases, labeling them "Type A" and "Type B," which provide little descriptive value, but are meant to differentiate leases based on the amount of the asset that is consumed during the term of the lease. The consumption principle sets the lease classification on the basis of whether the lease involves significant  consumption of the benefits of the asset being leased. 10 surety BoNd Quarterly | WINTER 2014 * Type A (Significant consumption) - the lessee is expected to consume more than insignificant portion of underlying asset. * Type B (Insignificant consumption) - the lessee is not expected to consume more than insignificant portion of underlying asset. FASB has not clearly defined "Insignificant consumption," the determination of which will require judgment. For most leases of assets other than property (for example, equipment, aircraft, cars, and trucks), a lessee would typically classify the lease as a "Type A" lease under the new standard and would do the following: 1. Recognize a right-of-use asset and a lease liability, initially measured at the present value of lease payments. 2. Recognize the unwinding of the discount on the lease liability as interest separately from the amortization of the right-of-use asset. For most leases of property (that is, land and/or a building, or part of a building), a lessee would classify the lease as a "Type B" lease under the new standard and would do the following: 1. Recognize a right-of-use asset and a lease liability, initially measured at the present value of lease payments. 2. Recognize a single lease cost, combining the unwinding of the discount on the lease liability with the amortization of the right-of-use asset, on a straight-line basis. How is the proposed standard different and how will it impact construction contractors? Assume a contractor enters into a four-year lease of an item of construction equipment, which has a total economic life of 12 years. The lease payments are $5,000 per month, the present value of which is $219,000, calculated using the rate the lessor charges the lessee (4.60 percent for this example). The fair value of the equipment at the lease commencement date is $750,000. Under existing standards this lease is an operating lease with rental payments expensed each month as the lease term is for a period less than seventy-five percent (75 percent) of the economic life of the asset and the net present value of the lease payments are less than ninety percent (90 percent) of the fair value of the equipment at the lease commencement date.

Table of Contents for the Digital Edition of Surety Bond Quarterly - Winter 2014

NASBP Upcoming Meetings
2014-2015 NASBP Executive Committee
From the CEO: Education is everywhere and in everything we do
Practical Insights: What You Need to Know-Lease Accounting, A new standard is coming
Surety Up North
Training the Next Generation of Surety Talent
EJCDC’s New P3 Document
The Top 10 Things Public Owners Should Know About Surety Bonds
What's a Construction Company's Most Valuable Asset?
NASBP Virtual Seminars
School’s Back!
New NASBP Resource: Information map of advocacy issues
Meetings in Photos
The Importance of Cracking the “WIP” Monthly
U.S. Customs and Border Protection to Deploy eBond
NASBP Outreach Continues Throughout the Year
Index to Advertisers

Surety Bond Quarterly - Winter 2014

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