The annual ELFA Lease and Finance Accounting Conference was held recently in Chicago, September 16-18. While it is well over three years since the new U.S. and international lease accounting standards, ASC 842 and IFRS 16, were issued, it is only in 2019 that public companies in the U.S. have begun to live within the new model. The 2019 lease accounting conference therefore focused on the application of the new standard and less on the transition to ASC 842.
Some of the topics related to the lease standards that were discussed in the breakout sessions included:
Even though the Lease and Finance Accounting Conference is for lessors, lessee accounting was also covered in depth. While the ASC 842 model put leases on balance sheet, it does not appear to have impacted the market for leases. Still, the accounting and reporting environment for customers has changed. The lessee sessions provided insights into some of the issues customers may be facing and presented the types of questions lessors may get from their customers. Some of the insights gained in this first year of adoption include:
In essence, adopting the accounting for leases required in ASC 842 was a major change management exercise for many companies.
There was also significant discussion of sale leaseback accounting during both the lessee and lessor breakout sessions. ASC 842 significantly changed the accounting for sale leaseback transactions for both equipment lessors and lessees through provisions that constrained the seller-lessee from achieving the sale leg of the transaction, especially if there is a lessee purchase option in the lease. These conditions would impact lease lines where a company purchases equipment and then batches a series of assets for a sale leaseback with a lessor. There has been some discussion about how the sale leaseback accounting may be avoided. At the conference it was observed that an agency agreement would not be enough by itself to keep the transaction outside the scope of sale leaseback accounting. Lessees will need to plan in advance if they wish to continue these transactions and will have to pre-program them. As customers evaluate the accounting, they will need to consider the control definition in the new standard, as well as the agency versus principal guidance in the accounting literature.
In addition to the in-depth discussion of ASC 842, the topic of the accounting model for credit reserves was discussed in several sessions. While the new Current Expected Credit Loss (or CECL) model (which replaces the incurred loss model used today) will not be implemented until next year by public companies, the need to book a lifetime credit loss allowance when a loan or lease is originated is challenging. Many of the challenges involve the data that is used to develop the reserve, and there was a joint session with the Operations and Technology conference to discuss these issues.
The conference also featured presentations by board members from the Financial Accounting Standards Board and International Accounting Standards Board. Marsha Hunt of the FASB was joined by representatives of the large accounting firms for a review of the Board’s activities along with a discussion of several leasing questions that have arisen in the past few months. One of the FASB’s actions that was covered was the matter of reference rate reform. The sunsetting of LIBOR and similar rates around the world leads to a series of accounting challenges related to the accounting for contract modifications and hedge accounting when the hedging derivative and/or the hedged loan or lease is modified for the change in reference rate away from LIBOR. The FASB developed a framework for dealing with these changes. LIBOR does not go away until 2021 and market use of secured overnight financing rate or SOFR is still in its infancy, but the change will require much effort since this is a business as well as an operational and accounting issue.
When it came to the subject of lease accounting during the FASB panel, lessee accounting took center stage. Notable was the discussion of lease impairments. While ASC 842 does include guidance on how a lessee should account for an impairment, the way the accounting model for impairments functions is based on whether the asset is tested for impairment by itself or with a group of other assets. A revenue generating asset, such as a leased aircraft or retail outlet, is tested individually and a general use asset, such as a copier or printer, is not. If a general use asset is no longer used, the abandonment may not be an impairment. How an abandonment is handled is to be determined.
The IASB presentation featured Board member Gary Kabureck, a frequent speaker at this conference. He noted in his presentation that the IASB received relatively few questions on the standard, and he reported that adoption of IFRS 16 appears to have gone smoothly. While IFRS 16 has been adopted by the large, public companies in a number of countries, the lease standard has not yet been brought into the separate and distinct accounting model of IFRS for small and medium sized enterprises or SME’s. The process of incorporating IFRS 16 into IFRS for SME’s will take a number of years.
These are just some of the highlights from the three-day conference. ELFA members may access more information about the conference on the ELFA’s website. •
