PWC Lease Accounting Guide (2016)



Leases

2016

This publication has been prepared for general informational purposes, and does not constitute professional advice on facts and circumstances specific to any person or entity. You should not act upon the information contained in this publication without obtaining specific professional advice. No representation or warranty (express or implied) is given as to the accuracy or completeness of the information contained in this publication. The information contained in this publication was not intended or written to be used, and cannot be used, for purposes of avoiding penalties or sanctions imposed by any government or other regulatory body. PricewaterhouseCoopers LLP, its members, employees, and agents shall not be responsible for any loss sustained by any person or entity that relies on the information contained in this publication. The content of this publication is based on information available as of March 31, 2016. Accordingly, certain aspects of this publication may be superseded as new guidance or interpretations emerge. Financial statement preparers and other users of this publication are therefore cautioned to stay abreast of and carefully evaluate subsequent authoritative and interpretative guidance.

Portions of various FASB documents included in this work are copyrighted by the Financial Accounting Foundation, 401 Merritt 7, Norwalk, CT 06856, and are reproduced with permission.

PwC guide library

Other titles in the PwC accounting and financial reporting guide series: Bankruptcies and liquidations (2014) Business combinations and noncontrolling interests, global edition (2014),

second edition Consolidation and equity method of accounting (2015) Derivative instruments and hedging activities (2013), second edition Fair value measurements, global edition (2015) Financial statement presentation (2014), second edition Financing transactions: debt, equity and the instruments in between (2014),

second edition Foreign currency (2014) IFRS and US GAAP: similarities and differences (2015) Income taxes (2013), second edition Revenue from contracts with customers, global edition (2014) Stock-based compensation (2013), second edition Transfers and servicing of financial assets (2013) Utilities and power companies (2013) Variable interest entities (2013), second edition

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Acknowledgments

The Leases guide represents the efforts and ideas of many individuals within PwC. The following PwC people contributed to the contents or served as technical reviewers of this publication:

Takashi Anraku John Bishop Roberta Chmielnik Justin Frenzel Ashima Jain Marc Jerusalem Nora Joyce Ralph Martino Chuck Melko Lauren Murphy Brian Ness Jeff Normant Jonathan Rhine Chad Soares Bill Staffieri Suzanne Stephani Valerie Wieman

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Preface

PwC is pleased to offer the first edition of our Leases guide. In February 2016, the FASB issued its standard on leases, ASC 842, which will replace today's leases guidance in 2019.

The chapters in this guide discuss both lessee and lessor accounting by topic. For example, LG 3 discusses lease classification for both lessees and lessors. The first four chapters provide an introduction and guidance on determining whether an arrangement is (or contains) a lease and how to classify and account for lease and nonlease components. This guide also discusses the modification, remeasurement, and termination of a lease, sale and leaseback transactions, leveraged lease transactions, as well as other topics. Finally, this guide contains chapters on the presentation and disclosure requirements, as well as the effective date and transition.

Locating guidance on particular topics

Guidance on particular topics can be located as follows:

Table of contents--The table of contents provides a detailed listing of the various sections in each chapter. The titles of each section are intentionally descriptive to enable users to easily find a particular topic.

Table of questions--The table of questions includes a listing of questions and PwC responses in numerical order, by chapter.

Table of examples--The table of examples includes a listing of examples in numerical order, by chapter.

The guide also includes a detailed index of key topics.

References to US GAAP

Definitions, full paragraphs, and excerpts from the Financial Accounting Standards Board's Accounting Standards Codification are clearly designated, either within quotes in the regular text or enclosed within a shaded box. In some instances, guidance was cited with minor editorial modification to flow in the context of the PwC Guide. The remaining text is PwC's original content.

References to other chapters and sections in this guide

Where relevant, the discussion includes general and specific references to other chapters of the guide that provide additional information. References to another chapter or particular section within a chapter are indicated by the abbreviation "LG" followed by the specific section number (e.g., LG 2.3.2 refers to section 2.3.2 in chapter 2 of this guide).

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References to other PwC guidance

This guide focuses on the accounting and financial reporting considerations for leases. It supplements information provided by the authoritative accounting literature and other PwC guidance. This guide provides general and specific references to chapters in other PwC guides to assist users in finding other relevant information. References to other guides are indicated by the applicable guide abbreviation followed by the specific section number. The other PwC guides referred to in this guide, including their abbreviations are:

Business combinations and noncontrolling interests (BCG)

Derivative instruments and hedging activities (DH)

Fair value measurements (FV)

Financial statement presentation (FSP)

Financing transactions: debt, equity and the instruments in between (FG)

Income taxes (TX)

Stock-based compensation (SC)

Transfers and servicing of financial assets (TS)

Variable interest entities (VE)

All references to the guides are to the latest editions noted in the PwC guide library. In addition, PwC's Accounting and reporting manual (the ARM) provides information about various accounting matters in US GAAP.

Copies of the other PwC guides may be obtained through CFOdirect, PwC's comprehensive online resource for financial executives (), a subscription to Inform, PwC's online accounting and financial reporting reference tool (), or by contacting a PwC representative.

Guidance date

As the environment continues to change, so will the content in this guide. This guide considers existing guidance as of March 31, 2016. Future editions will be released to keep pace with significant developments.

Certain events, such as the issuance of a new pronouncement by the FASB, a consensus (and ensuing endorsement by the FASB) of the Emerging Issues Task Force, or new SEC rules or guidance, may necessitate an update or supplement to the guide. Updates or supplements that may be in the form of other PwC communications can be found on CFOdirect () or Inform ().

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Other information

The appendices to this guide include guidance on professional literature, a listing of technical references and abbreviations, and definitions of key terms.

* * * * *

This guide has been prepared to support you in applying the leases accounting guidance. It should be used in combination with a thorough analysis of the relevant facts and circumstances, review of the authoritative accounting literature, and appropriate professional and technical advice.

We hope you find the information and insights in this guide useful. We will continue to share with you additional perspectives and interpretations as they develop.

Paul Kepple US Chief Accountant

2016

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Table of contents

Chapter 1: Introduction

1.1 1.2 1.2.1 1.2.2 1.2.3 1.3 1.4 1.5 1.6

Background ........................................................................ 1-2 High-level overview ............................................................ 1-4 Definition and scope........................................................... 1-5 Lessee classification ........................................................... 1-6 Lessor classification ........................................................... 1-6 Comparison of ASC 842 and ASC 840 ................................. 1-6 Disclosures......................................................................... 1-11 Transition and effective date .............................................. 1-11 Implementation guidance .................................................. 1-12

Chapter 2: Scope

2.1 2.2 2.2.1 2.3 2.3.1 2.3.1.1 2.3.1.2 2.3.1.3 2.3.1.4 2.3.2

2.3.2.1 2.3.2.2 2.3.2.3 2.4 2.4.1 2.4.2

2.4.3

2.4.3.1 2.4.4 2.4.4.1

Chapter overview ............................................................... 2-2

Exceptions to applying lease accounting............................. 2-2 Short-term lease exception for lessees ............................... 2-3 Definition of a lease............................................................ 2-3 Use of an identified asset .................................................... 2-5 Explicitly identified asset...................................................................... 2-5 Implicitly identified asset ..................................................................... 2-5 Physically distinct ................................................................................. 2-6 Substantive substitution rights ............................................................ 2-7 Right to control the use of an identified asset over the period of use ...................................................................... 2-11 The right to obtain substantially all of the economic benefits............. 2-12 Right to direct the use of the identified asset....................................... 2-14 Examples ? the right to control the use of an identified asset ............ 2-18

Separating lease and nonlease components ....................... 2-21 Identifying lease and nonlease components ....................... 2-22 Lessor allocation of consideration to lease and nonlease components ......................................................... 2-23 Lessee allocation of consideration to lease and nonlease components ......................................................... 2-24 Practical expedient for lessees.............................................................. 2-25 Allocation of variable consideration ................................... 2-25 Allocating variable consideration for lessors ....................................... 2-25

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