The business value agenda offers examples of business objectives to which Internal Audit can align
Issues and steps - how Ernst & Young can help
| Issues and steps | How Ernst & Young can help |
| Gain a general understanding of the proposal | - Design and deliver a training session for company personnel
- Share insights of IASB, FASB and regulator views
- Provide input into the company’s comment letter on the ED
|
| Perform a preliminary assessment of the impact of the proposal on the company’s financial statements | Advise and provide input into:
- Gathering necessary lease information to adopt the proposed standard
- Summarising lease terms
- Performing a high-level measurement of the right-of-use asset and related liability to make lease payments (for lessees)/lease receivable, lease liability, or residual asset (for lessors, depending on the approach followed)
- Assisting lessors in determining which accounting model applies to their leases
- Calculating the income statement impact of adopting the proposed
standard - Assessing the impact on key financial ratios and performance measures
- Identifying shortfalls in available information to adopt the proposed
standard |
| Benchmark the company against peers and others in the industry | - Provide observations of how others are approaching the proposal, problems they encountered and solutions developed
- Assist in the evaluation of peers, competitors and industry disclosures and expected impact on the financial statements
|
| Assess processes for data collection, internal controls and IT systems | - Provide observations and insights based on leading practices on ways the company could design its business processes, IT systems and internal controls
- Provide criteria to consider in selecting IT packages and assist in the selection process
|
| Assess tax positions relating to lease proposal | - Assist in analysing tax positions arising from adopting the new proposal, reducing tax exposure and determining tax effects of lease modifications
|
| Plan for ultimate adoption of the proposed standard | - Advise on project maintenance and planning, including timeline, tasks and resource allocation
|
| Update accounting manuals and accounting policies | - Read and provide input into accounting manuals and policies selected by management
|
| Communicate effect of adoption to stakeholders, analysts, regulators and shareholders | - Advise on developing a communication plan
- Advise on drafting communications
|
Leasing may affect a broad range of companies — those that lease large individual assets like real estate and aircraft, as well as those that enter numerous smaller leases for items like office equipment.
The IASB and FASB are actively working together on a number of high profile projects. The overall objective is to both improve existing accounting standards and bring greater convergence between IFRS and US GAAP.
Does this affect your business?
Leasing is one of the more prominent projects and one that may affect a broad range of companies — those that lease large individual assets like real estate and aircraft, as well as those that enter numerous smaller leases for items like office equipment.
I’m a leasee. What should I expect?
- All leases would appear on the balance sheet, eliminating the distinction between operating and finance leases
- Assets and liabilities would be grossed up
- Lease liabilities would be re-evaluated at each reporting date when indications of significant changes exist, likely requiring substantial changes to internal controls and information systems
- Leverage ratios and capital ratios would deteriorate
- Timing of expense recognition would accelerate and expense would be recharacterised as interest expense and amortisation instead of rent
- Earnings before interest, taxes, depreciation and amortisation (EBITDA) would be more favourable
- Cash flows from operating activities, as presented in the statement of cash flows, would be more favourable
- Tax issues could arise
Why is lease accounting changing?
Improving lease accounting has been a long-time goal of both the IASB and the FASB. The major criticism of the existing lease standards is that lessees do not recognise all lease obligations on their balance sheets, based on what some consider to be arbitrary distinctions between operating and finance leases.
The Boards are addressing this criticism in their leasing project.
When will the changes be effective?
IASB and FASB issued a Discussion Paper, Leases: Preliminary Views in March 2009, and issued an Exposure Draft on 17 August 2010.
A final standard is expected in 2011. The Boards are still deliberating the effective date of the lease standard, but it is expected to be 2013 or later.
In view of the multiple projects underway that are all scheduled to be completed in mid to late 2011, the IASB is considering different effective date options. One possibility is a collective ‘big bang’ effective date for all the new standards on the same date, or possibly staggered effective dates over a period of several years.
Regardless of the effective date ultimately chosen, the Boards have tentatively decided that existing lease arrangements would not be grandfathered.
This means that all existing leases as of the date of initial application would need to be assessed under the new standard, not just those entered into prospectively.
The date of initial application is the beginning of the first comparative period presented in the first financial statements in which the proposal would be applied.
We can help assess your lease accounting changes and obligations
Companies should begin to prepare for the resulting impacts on their financial metrics, debt structuring, business processes and information management.
See a detailed list of issues and steps to take.
