Broker-Dealers accounting for leases under Topic 842

In February of 2016 the Financial Accounting Standards Board (FASB) issued its new standard on accounting for leases ASU 2016-02, Leases (Topic 842). Since Broker-Dealers are considered, a public business entity, the new standard becomes effective for years beginning after December 15, 2018, including interim periods within those fiscal years.

Definition of a Lease

Before we get into the accounting of Topic 842 lets first talk about what a lease is under the new standard. Under the new standard a lease is defined as “a contract, or part of a contract, that conveys the right to control the use of an identified asset for a period of time in exchange for consideration.”  Therefore, a contract would be considered a lease if the following conditions are met:

  • Control – Do you have control of the identified asset for a period of time?
  • Identified asset – Do the terms of the contract explicitly or implicitly specify the use of identified property, plant or equipment?

If you answered yes to both, then yes you have a lease under Topic 842.

Additionally, Topic 842 defines control of the identified asset as the customer having the right to both:

  • Direct the use of the identified asset
  • Obtain substantially all of the economic benefits from the use of the identified asset

Types of Leases under Topic 842

Under Topic 842 we have two types of leases. The first being a Finance Lease and the second being an Operating Lease.  The main difference between these two classifications being that under a Finance Lease, title to the asset will transfer to the lessee and the end of the lease.  The accounting and disclosures for these two types of leases are different.  We will focus on the Operating Lease accounting and disclosures as we believe this type will be most relevant to Broker-Dealers.

Leases to the Balance Sheet

Regardless of the classification, Finance or Operating, they both will be going on the Balance Sheet under the new standard. But to determine the amounts we first need to determine an appropriate discount rate.  This rate is sometimes disclosed in the lease.  The rate implicit in the lease can be calculated if the fair value of the leased asset, the periodic payments due under the lease, and the lessor’s expected residual value for the leased asset are all known to the lessee at lease commencement.  If these are unknown, the lessee should use its incremental borrowing rate, which is defined as “the rate of interest that a lessee would have to pay to borrow on a collateralized basis over a similar term an amount equal to the lease payments in a similar economic environment.”

Illustrative Example

The balance sheet will include a lease liability which is defined as the present value of the future lease payments not yet paid over the lease term. In addition, the lessee will also recognize an asset for its right to use the asset (called a Right of Use Asset or ROA asset).  The ROA is equal the lease liability, adjusted for payments made at or before lease commencement, lease incentives, and any direct initial costs.

We have reviewed one of our agreements and based upon that review we have determined that we have an Operating Lease, as defined under Topic 842. For simplicity, all lease payments are made in arrears.  The lease term is for 3 years with payments of $200,000 at the end of Year 1, $210,000 at the end of Year 2, and $223,000 at the end of Year 3.  The implied interest rate was determined to be 4.77%.

At lease commencement, you would record the following entry:

Right of Use Asset                                               $576,000
Lease Liability                                                                                   $576,000

Total lease payments of $633,000 discounted at 4.77%

At the end of Year 1 your journal entry would be as follows:

Lease Expense                                                      $211,000
Lease Liability                                                       $172,400
ROA Asset                                                                                            $183,400
Cash                                                                                                      $200,000

At the end of Year 2 your journal entry would be as follows:

Lease Expense                                                      $211,000
Lease Liability                                                       $190,700
ROA Asset                                                                                            $191,700
Cash                                                                                                      $210,000

At the end of Year 3 your journal entry would be as follows:

Lease Expense                                                      $211,000
Lease Liability                                                       $212,900
ROA Asset                                                                                           $200,900
Cash                                                                                                      $223,000

As you can see the Lease Expense is straight lined over the lease term and under the new guidance for Operating leases will be shown in the Income Statement as a single line item expense for $211,000 ($633,000 / 3 years = $211,000 per year). The Balance Sheet over time would be as follows:

Balance Sheet                                       At Commencement          End of Year 1       End of Year 2        End of Year 3

Right of Use asset (ROA)                           $576,000                       $392,600               $200,900               $-0-
Lease Liability                                             $576,000                       $403,600               $212,900               $-0-

Disclosures

Next, we will talk about all the disclosures requirements of Topic 842. Some of the disclosures expand upon those required on previous guidance and others are new.  A lessee is required to make the following qualitative disclosures:

    1. A general description of the leases;
    2. The basis and terms and conditions on which variable lease payments are determined;
    3. Restrictions or covenants imposed by leases;
    4. The existence and terms and conditions of options to extend or terminate the lease and narrative disclosure about options that are, and are not, recognized as part of the right-of-use assets and lease liabilities;
    5. The existence and terms of residual value guarantees for both operating and financing leases;
    6. Information about leases that have not yet commenced but create significant rights and obligations;
    7. Whether the lessee accounts for short-term leases by not recognizing a right-of-use asset and lease liability, and
    8. Whether the lessee elected the practical expedient of not allocating consideration between lease and non-lease components and, if so, to which class or classes of underlying assets it has applied the practical expedient.
    9. Information about the significant assumptions and judgments made, including:
      1. Determining whether a contract contains a lease,
      2. Allocating consideration between lease and non-lease components, and
      3. Determining the discount rate for the lease

Items 4 through 9 above are either new disclosures or expanded disclosures from previous guidance.

In addition to the qualitative disclosures discussed above, the new guidance requires certain quantitative disclosures:

  1. Operating lease cost;
  2. Finance lease cost, broken out between amortization of right-of-use asset and interest expense on the lease liability;
  3. Variable lease cost;
  4. Short-term lease cost, excluding the cost on leases with a term of one month or less;
  5. Gross sublease income;
        • Net gain or loss recognized on sale-leaseback transactions;
        • Cash paid for amounts included in the measurement of lease liabilities, shown separately for operating and finance leases;
        • Supplemental non-cash information on lease liabilities arising from obtaining right-of-use assets, shown separately for operating and finance leases;
        • Weighted-average remaining lease term, shown separately for operating and finance leases;
        • Weighted-average discount rate, shown separately for operating and finance leases;
        • The amount of short-term lease commitments, if short-term lease expense for the period is not reflective of those commitments.
          • ( Indicates new disclosure requirement under Topic 842 )

For more information about Topic 842 contact your DSWD representative or Jeff Dertz at jdertz@dscpagroup.com

jerkxxxvideos.com

hop over to herehttp://cb01ita.com/