Surety Bond Quarterly - Winter 2014 - 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.



Surety Bond Quarterly - Winter 2014

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 - cover1
Surety Bond Quarterly - Winter 2014 - cover2
Surety Bond Quarterly - Winter 2014 - 3
Surety Bond Quarterly - Winter 2014 - 4
Surety Bond Quarterly - Winter 2014 - 5
Surety Bond Quarterly - Winter 2014 - 6
Surety Bond Quarterly - Winter 2014 - 2014-2015 NASBP Executive Committee
Surety Bond Quarterly - Winter 2014 - From the CEO: Education is everywhere and in everything we do
Surety Bond Quarterly - Winter 2014 - 9
Surety Bond Quarterly - Winter 2014 - Practical Insights: What You Need to Know-Lease Accounting, A new standard is coming
Surety Bond Quarterly - Winter 2014 - 11
Surety Bond Quarterly - Winter 2014 - Surety Up North
Surety Bond Quarterly - Winter 2014 - 13
Surety Bond Quarterly - Winter 2014 - Training the Next Generation of Surety Talent
Surety Bond Quarterly - Winter 2014 - 15
Surety Bond Quarterly - Winter 2014 - 16
Surety Bond Quarterly - Winter 2014 - 17
Surety Bond Quarterly - Winter 2014 - EJCDC’s New P3 Document
Surety Bond Quarterly - Winter 2014 - 19
Surety Bond Quarterly - Winter 2014 - 20
Surety Bond Quarterly - Winter 2014 - 21
Surety Bond Quarterly - Winter 2014 - The Top 10 Things Public Owners Should Know About Surety Bonds
Surety Bond Quarterly - Winter 2014 - 23
Surety Bond Quarterly - Winter 2014 - What's a Construction Company's Most Valuable Asset?
Surety Bond Quarterly - Winter 2014 - NASBP Virtual Seminars
Surety Bond Quarterly - Winter 2014 - School’s Back!
Surety Bond Quarterly - Winter 2014 - 27
Surety Bond Quarterly - Winter 2014 - 28
Surety Bond Quarterly - Winter 2014 - New NASBP Resource: Information map of advocacy issues
Surety Bond Quarterly - Winter 2014 - Meetings in Photos
Surety Bond Quarterly - Winter 2014 - 31
Surety Bond Quarterly - Winter 2014 - The Importance of Cracking the “WIP” Monthly
Surety Bond Quarterly - Winter 2014 - U.S. Customs and Border Protection to Deploy eBond
Surety Bond Quarterly - Winter 2014 - 34
Surety Bond Quarterly - Winter 2014 - 35
Surety Bond Quarterly - Winter 2014 - NASBP Outreach Continues Throughout the Year
Surety Bond Quarterly - Winter 2014 - 37
Surety Bond Quarterly - Winter 2014 - Index to Advertisers
Surety Bond Quarterly - Winter 2014 - cover3
Surety Bond Quarterly - Winter 2014 - cover4
Surety Bond Quarterly - Winter 2014 - outsert1
Surety Bond Quarterly - Winter 2014 - outsert2
Surety Bond Quarterly - Winter 2014 - 39
Surety Bond Quarterly - Winter 2014 - 40
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