FINANCIAL WATCH By Jeannine Flower, Barbara Galaini, Shawn Halladay and Ann Gill Impacts of the New Revenue Standard on Leasing I includes (a) Topic 606 “Revenue from Contracts with Customers,” which replaces all pre-existing U.S. GAAP revenue recognition guidance; (b) a new Subtopic 340-40 addressing treatment of costs associated with obtaining the contract; and (c) a new Topic 610 “Other Income” located in a separate document that addresses transfers of nonfinancial assets. This new guidance is effective for annual reporting periods beginning after Dec. 15, 2016, for public entities. It is the first global converged standard issued by the FASB (Topic 606) and the International Accounting Standards Board (IASB) (IFRS 15) with only a small handful of differences. While the scope excludes lease contracts and financial instruments, don’t succumb to complacency, as Topic 606 still can impact lessees and lessors. N MAY 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2014-09, which Topic 606 introduces a control model for revenue recog-nition and new aspects of measurement. There are five steps: 1. Identify the customer contract. 2. Identify the performance obligations in the contract. 3. Determine the transaction price, both fixed and variable (if it is a predictable value) along with any non-cash con-sideration and adjusted for the time value of money attrib-utable to any identifiable significant financing component. 4. Allocate the transaction price to each performance obli-gation based on a relative observable standalone selling prices or, in its absence, reasonable estimates. 5. Recognize revenue when control transfers to customer, either “over time” or “at a point in time.” While Topic 606 excludes lease contracts, it does apply to non-lease elements of bundled lease-service arrangements. Lessors—maintenance and software revenue recognition Lessees—the extent to which such costs can be excluded from capitalization as part of the right of use asset ● While currently unclear, Topic 606 may also apply to the treatment of executory costs. ● ● While the revenue recognition guidelines exclude lease contracts and financial instruments, don’t succumb to complacency, as they still can impact lessees and lessors. There is also a more subtle change shifting from the cur-rent “risks and rewards” model to a “control-based” model. Some guidance evaluated risks and rewards in the context of continuing involvement (e.g., real estate), while other bases of application were more quantitative (e.g., transferring more than 90% of the benefits and risks of the underlying assets to the buyer). The notion of control used in Topic 606 is in-tended for consistent application for all forms of goods and services from a customer perspective. Topic 606 provides a list of five indicators of control, not all of which must be met: (1) present right to payment, (2) legal title, (3) physical possession, (4) risks and rewards of ownership and (5) customer acceptance. While there is a view that typically an entity that has transferred risks and rewards of ownership of an asset typically has transferred control to a customer, it may not be the case in all circum-stances and judgment will be required. The Topic 610 guidance on sale/transfers of nonfinan-cial assets (e.g., equipment and real estate) requires applica-tion of Topic 606 guidance: (a) recognition criteria based on whether control of the asset transfers and (b) measurement including variable consideration, when predictable, and any significant financing component and non-cash considera-tion. It also clarifies P&L presentation of gain (loss) on sale as “revenue” if output from entity’s ordinary activities, oth-erwise, reported as “other income.” Topic 610 replaces ASC 840-20-40-3 and 4 and the continuing involvement model related to real estate transactions (ASC 360 and ASC 840). Given this, care will need to be given to structured transac-tions under the new guidance. The discussion of whether to delay the effective date of Topic 606 contemplated for the April 2015 Board meeting will impact the issue date of the final lease standard. A key concern to equipment lessors is that the FASB’s new lease standard (Topic 842) draws upon specific guidance provided in Topic 606. That being said, there are certain nu-ances to which close attention should be paid: 34 MAY/JUNE 2015 EQUIPMENT LEASING & FINANCE MAGAZINE SHUTTERSTOCK / ANDREI SHUMSKIY