The Dbriefs Financial Reporting series presents: Leases: A Comprehensive Update on the Joint Project Name April 2013

Copyright © 2013 Deloitte Development LLC. All rights reserved. Significant provisions Lessee accounting Lessor accounting Other considerations Question and answer Agenda

Copyright © 2013 Deloitte Development LLC. All rights reserved. This webcast does not provide official Deloitte & Touche LLP interpretive accounting guidance Check with a qualified advisor before taking any action See later slides for information on obtaining written summaries of issues discussed today Keep in mind 1

Copyright © 2013 Deloitte Development LLC. All rights reserved. To enhance participants’ understanding of important accounting issues and developments pertaining to recent actions of the FASB, IASB and EITF. Learning objective 2

Significant Provisions

Copyright © 2013 Deloitte Development LLC. All rights reserved. Overview and timing 5 Effective Date Expected to be no sooner than 2017 Final Standard Expected to be issued 2014 Revised ED Expected to be issued second quarter 2013 Original Exposure Draft (ED) Issued in August 2010 Comment period ended December 2010 Over 750 letters received 3

Copyright © 2013 Deloitte Development LLC. All rights reserved. Scope Overall – similar to current U.S. GAAP Exclude: –Leases for the right to explore for or use minerals, oils, natural gas, and similar nonregenerative resources –Leases of biological assets, including timber –Intangible assets 4

Copyright © 2013 Deloitte Development LLC. All rights reserved. Short-term leases Maximum possible lease term, including options to renew, that is 12 months or less Short-term leases would include leases that: –Are cancellable by both the lessee and lessor with minimal termination payments, or –Include renewal options that must be agreed to by both the lessee and lessor Current operating lease treatment for lessee and lessor Elective in nature by underlying asset class 5

Copyright © 2013 Deloitte Development LLC. All rights reserved. Definition of a lease Specified asset –Explicitly or implicitly identified –Substitution rights must be considered Control –“Ability to direct the use” and “receive the benefit from use” Rights to substantially all economic benefits from use over the lease term Taking all of the output will no longer be determinative A contract in which the right to use a specified asset (the underlying asset) is conveyed, for a period of time, in exchange for consideration 6

Copyright © 2013 Deloitte Development LLC. All rights reserved. Lease term Contract Factors Noncancellable period + renewal period(s) for which lessee has significant economic incentive to exercise renewal options Asset Factors Entity Factors Market Factors The historical practice of the entity, management’s intent, and common industry practice Market rentals for comparable assets Specific characteristics of the underlying asset The terms included in the lease agreement 7

Copyright © 2013 Deloitte Development LLC. All rights reserved. Lease payments Variable lease payments - only included if: Fixed lease payments Include lease payments that are to be made over the lease term –For example, payments required in a period that follows a termination option are used to measure lease assets and liabilities if it is determined that the lessee has a significant economic incentive to not exercise the termination option In-substance fixed payments Payments based on index or rate 8

Copyright © 2013 Deloitte Development LLC. All rights reserved. Lessees – Include the difference between the expected residual value and the guaranteed residual value Lessors – Certain RVGs considered lease payments. All RVGs can be considered in evaluating the impairment of residual assets Recognition, measurement and classification Treated consistently with the determination of the lease term Lease payments Residual value guarantees (RVGs) Purchase options Termination penalties 9

Copyright © 2013 Deloitte Development LLC. All rights reserved. Allocate transaction price based on whether or not the purchase price is observable If purchase price of each component is observable – based on relative purchase price of individual components If purchase price of one or more components, but not all, is observable – based on a residual method If none of the purchase prices are observable – account for the entire transaction as a lease Lessee Allocate transaction price on a relative standalone selling price basis (consistent with the revenue proposal) Estimate standalone selling price if not observable Expected cost-plus margin, adjusted market assessment, or residual method (if price is highly variable or uncertain) are acceptable estimation methods Lessor Contracts that contain lease and nonlease components 10

Copyright © 2013 Deloitte Development LLC. All rights reserved. Discount rate Lessee Lessor Rate the lessor charges the lessee, which could be: Lessee’s incremental borrowing rate Rate implicit in the lease Yield on the property for property leases Rate the lessor charges the lessee when available; otherwise, its incremental borrowing rate Discount rate should be reassessed when there is a change in the lease payments 11

Lessee Accounting

Copyright © 2013 Deloitte Development LLC. All rights reserved. Initial measurement Right-of-use asset Present value (PV) of lease payments + lessee’s initial direct costs Initial direct costs: Incremental costs directly attributable to negotiating and arranging a lease Recognize lease incentives as a reduction in the right-of-use asset Lease liability PV of lease payments Subsequent measurement Right-of-use asset Amortized cost: Method of amortization depends on nature of underlying asset (see slides that follow) Impairment: Refer to existing standards (ASC 360) Lease liability Amortized cost: Use the effective interest method Lessee accounting 12

Copyright © 2013 Deloitte Development LLC. All rights reserved. A lessee’s determination of the appropriate expense recognition pattern would be based on “whether the lessee acquires and consumes more than an insignificant portion of the underlying asset” Is the leased asset “property”? Lease term is a major portion of asset’s remaining economic life OR PV of fixed lease payments accounts for substantially all of the FV Financing Approach Straight-line Expense Approach Lease term is insignificant to asset’s total economic life OR PV of fixed lease payments insignificant relative to asset FV? Straight-line Expense Approach Financing Approach Yes No Lessee accounting 13

Copyright © 2013 Deloitte Development LLC. All rights reserved. Classification of lease components Analyze agreement to determine if separate accounting is required for lease components Use of the asset depends on other assets that are readily available to the entity Use of the asset is interrelated with other assets identifiable in the contract Classification should be based on the primary asset of the lease component Land and building elements of a property lease would not need to be assessed separately 14

Copyright © 2013 Deloitte Development LLC. All rights reserved. Lessee accounting 15

Copyright © 2013 Deloitte Development LLC. All rights reserved. Lessee accounting Constituents’ concern about income statement effect being inconsistent with lease economics 16

Copyright © 2013 Deloitte Development LLC. All rights reserved. Reassessment of lease payments 17

Lessor Accounting

Copyright © 2013 Deloitte Development LLC. All rights reserved. Receivable and residual Derecognize Underlying asset Recognize Lease receivable Residual asset Defer profit relating to the residual asset (netted with residual asset) Operating lease Continue to recognize the underlying asset and recognize lease income over the lease term Lessor accounting 18

Copyright © 2013 Deloitte Development LLC. All rights reserved. A lessor’s determination of the appropriate expense recognition pattern would be based on “whether the lessee acquires and consumes more than an insignificant portion of the underlying asset” Is the leased asset “property”? Lease term is a major portion of asset’s remaining economic life OR PV of fixed lease payments accounts for substantially all of the FV Receivable and Residual Approach Operating Lease Approach Lease term is insignificant to asset’s total economic life OR PV of fixed lease payments insignificant relative to asset FV? Receivable and Residual Approach Yes No Lessor accounting Operating Lease Approach 19

Copyright © 2013 Deloitte Development LLC. All rights reserved. Lessor accounting A manufacturer leases a piece of its equipment to a lessee. The leased equipment has a carrying amount of $20,000 and a fair value of $24,000 at lease commencement. The terms of the lease are as follows: 20

Copyright © 2013 Deloitte Development LLC. All rights reserved. Lessor accounting

Other Considerations

Copyright © 2013 Deloitte Development LLC. All rights reserved. Other considerations Lease commencement Recognition, measurement and classification Build to suit transactions The guidance in ASC related to a lessee’s involvement with construction (previously EITF 97-10) will not be carried forward Subleases Head lease – account for assets and liabilities in accordance with guidance for lessees Sublease – account for assets and liabilities in accordance with guidance for lessors 22

Copyright © 2013 Deloitte Development LLC. All rights reserved. Existing guidance will not be carried forward Entities should look to the guidance on revenue recognition to determine whether the conditions of sale are met ‒ Consider whether the seller/lessee has the ability to direct the use of, and obtain substantially all of the remaining benefits from, the asset If revenue recognition conditions are met, a “whole asset approach” would be used in accounting for the transaction If consideration is fair value, gains and losses would not be deferred Other considerations Sale and leaseback transactions 23

Copyright © 2013 Deloitte Development LLC. All rights reserved. Transition – Lessee Full retrospective approach OR Modified retrospective approach –Operating leases existing at beginning of earliest comparative period presented: –Capital leases existing at the beginning of earliest comparative period presented: Apply existing guidance for recognition and measurement purposes Reclassify carrying amount of lease assets and liabilities as right- of-use assets and lease liabilities Finance MethodStraight Line Method Recognize lease liability at PV of remaining lease payments Recognize right-of-use asset as a proportion of lease liabilities Recognize difference in retained earnings Reverse straight line accrual Recognize lease liabilities at PV of remaining lease payments Recognize right-of-use asset at the amount of the related lease liability Reverse straight line accrual 24

Copyright © 2013 Deloitte Development LLC. All rights reserved. Transition – Lessee 25

Copyright © 2013 Deloitte Development LLC. All rights reserved. Transition – Lessor Full retrospective approach OR Modified retrospective approach –Operating leases existing at beginning of earliest comparative period presented: –Sales-type and financing leases existing at the beginning of earliest comparative period presented: Apply existing guidance for recognition and measurement purposes Reclassify the amounts recorded in accordance with the proposed presentation requirements Receivable and Residual Method Recognize lease receivable asset measured at present value of remaining lease payments Recognize residual asset based on the proposed model Derecognize the leased asset 26

Copyright © 2013 Deloitte Development LLC. All rights reserved. Increased judgments Right-of-use assets will need to be evaluated for impairment Tax complexities Increased disclosures Financial Reporting New systems requirements Identification lease arrangements and capturing relevant data Changes to internal controls Systems Compliance with debt covenants Educating analysts Lease vs. buy decisions Business Changes Operational and implementation challenges 27

Question and answer

Copyright © 2013 Deloitte Development LLC. All rights reserved. Contact info Bob James Trevor Beth

Copyright © 2013 Deloitte Development LLC. All rights reserved. This presentation contains general information only and Deloitte is not, by means of this presentation, rendering accounting, business, financial, investment, legal, tax, or other professional advice or services. This presentation is not a substitute for such professional advice or services, nor should it be used as a basis for any decision or action that may affect your business. Before making any decision or taking any action that may affect your business, you should consult a qualified professional advisor. Deloitte shall not be responsible for any loss sustained by any person who relies on this presentation.

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