Question

what are the required disclosures for lease obligations, and why are they important to the financial statements?

Imagine you are a company that is required to prepare financial statements. You have a lease. Prepare a partial financial statement for the lease transactions ?

Answer 1

The leases standard includes a disclosure objective intended to provide users of financial statements with information adequate to assess the amount, timing and uncertainty of cash flows arising from leases. Both quantitative and qualitative disclosure requirements will increase for lessors and lessees. The disclosures apply regardless of lease classification—ASC 840 included some of these disclosures for capital leases, not operating leases. These new disclosures, bolded below, may require new processes and internal controls. These disclosures are subject to audit and, for public entities, will be in scope for management’s report on internal controls.

  Lessees must consider the level of detail necessary to satisfy the disclosure objective and how much emphasis to place on each of the various requirements. Aggregation should be at a level so useful information is not obscured by including a large amount of insignificant detail or by aggregating items that have different characteristics. For companies with extensive significant leasing activities, more comprehensive disclosures will be expected.Some of the disclosures are:

DISCLOSURES OF OPERATING LEASE IN FINANCIAL STATEMENTS;

LESSOR;

1. For each class of assets

• Gross carrying amount
• Accumulated & Period depreciation charged
• Accumulated & Period impairment loss
• Impairment loss reversed for the period

2. Future MLP under non-cancellable lease term.

3. Contingent rent recognized.

4. General description of significant leasing agreements.

5. Accounting policies for initial direct costs.

LESSEE;

1. Segregate Lease asset from owned assets.

2. Net Carrying amount at the Balance Sheet date for each class of assets.

3. Reconciliation of brought forward MLP at Balance Sheet date and present value.

4. Contingent Rent recognized.

5. Future minimum sub-lease payments to be received under non-cancellable sub-leases.

6. General Description of significant leasing agreements.

7. Depreciation according to AS 6 and Fixed assets according to AS 10.

DISCLOSURES OF OPERATING LEASE IN FINANCIAL STATEMENTS;

LESSOR;

1. For each class of assets

• Gross carrying amount
• Accumulated & Period depreciation charged
• Accumulated & Period impairment loss
• Impairment loss reversed for the period

2. Future MLP under non-cancellable lease term.

3. Contingent rent recognized.

4. General description of significant leasing agreements.

5. Accounting policies for initial direct costs.

6. Depreciation according to AS 6 and Fixed assets according to AS 10.

LESSEE:

1. Future MLP under non-cancellable lease.

2. Future minimum sub-lease payments.

3. MLP & Contingent rent recognized.

4. Sub-lease payments recognized.

5. General description of significant leasing agreements

Importance of disclosures in financial statements:

The leasing standard will change a variety of financial statement captions. The impact of the new standard will be significant to the balance sheet. The impact to the financial statement captions—and the financial analysis—gets complicated for investors as they consider the impact of: ■ the different types of leases (i.e., operating vs. finance); ■ the standards followed (i.e., IFRS [finance] vs. US GAAP [operating vs. finance]); ■ the transition methods (i.e., restating prior periods or adopting at the beginning of the accounting period adopted); and ■ the effects of the lease types, accounting standards, and transition methods, not just at inception but also over time. The analytical considerations quickly become challenging.. The leases standard includes a disclosure objective intended to provide users of financial statements with information adequate to assess the amount, timing and uncertainty of cash flows arising from leases.