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Summary of the New Leasing Standard (ASC 842) and Its Impact on the Transportation and Logistics Industry

Core Content

The document provides an in-depth analysis of the new leasing standard under US GAAP, specifically ASC 842, which was issued by the FASB in 2016. This standard represents a significant overhaul of lease accounting, requiring all leases with a term of more than one year to be capitalized on the balance sheet. The document is a supplement to the In depth US2016-02 and is tailored to the transportation and logistics industry, highlighting how entities in this sector may be impacted by the new standard.

Main Views

• All leases with terms over one year must be recognized on the balance sheet as a right-of-use asset and a lease liability.
• Lessee accounting model classifies leases as either operating or financing, which affects how lease expenses are recognized on the income statement.
• Lessor accounting model remains largely the same as current US GAAP, but requires additional considerations under the new revenue recognition standard (ASC 606).
• Embedded leases are those arrangements that contain an identified asset and provide the lessee with the right to control its use. Determining whether an arrangement contains an embedded lease is critical for proper accounting.
• Judgment and analysis are required to assess whether an arrangement contains a lease, especially when the asset is not explicitly identified but is implicitly controlled by the lessee.
• Contract consideration must be allocated between lease and nonlease components based on their standalone prices, with certain exceptions and practical expedients available.

Key Information

Effective Date

• Public business entities: Effective for fiscal years beginning after December 15, 2018, with an adoption date no later than January 1, 2019 for calendar year-end entities.
• Non-public entities: Effective for fiscal years beginning after December 15, 2019, and interim periods beginning after December 15, 2020.
• Early adoption is permitted for all entities.

Impact on Transportation and Logistics Industry

• The industry is expected to be significantly affected due to the high volume and value of leases.
• Entities must reevaluate contract negotiations, budgeting, key metrics, systems, and data requirements.
• The new model requires more transparency and comparability across organizations.

Embedded Leases

• An arrangement contains a lease if it conveys control over an identified asset.
• Identified assets must be physically distinct and the lessee must have the right to direct use and obtain substantially all economic benefits.
• Substitution rights by the lessor are considered substantive if they are economically beneficial to the lessor and practically exercisable throughout the term of the lease.

Lease Classification and Accounting

• Operating leases result in straight-line expense recognition.
• Financing leases result in amortization and interest expense.
• Lease modifications and reassessment are required under the new standard.
• Sale-leaseback arrangements are also addressed, with different implications depending on lease classification.

Components, Contract Consideration, and Allocation

• Arrangements may contain lease and nonlease components, which are subject to different accounting treatments.
• Property taxes and insurance are not considered separate components and are treated as part of contract consideration unless paid as fixed amounts.
• Maintenance costs are considered nonlease components if provided by the lessor.
• Allocation of contract consideration is based on standalone prices, with practical expedients available for certain lessees to combine lease and nonlease components.

PwC Observations

• The transportation and logistics sector frequently involves complex arrangements that may contain embedded leases.
• Examples include wet leases, bareboat charters, time charters, voyage charters, warehouse space contracts, and rail car leases.
• Judgment is required in determining whether an arrangement contains a lease, especially when substitution rights are involved.
• Nonlease components such as maintenance, insurance, and operating costs can have significant financial impacts when allocated under the new standard.
• The practical expedient to not separate lease and nonlease components may lead to larger lease obligations and right-of-use assets being recorded, which can affect balance sheet presentation.

Conclusion

The new leasing standard ASC 842 significantly changes how leases are accounted for, particularly in the transportation and logistics industry, where many arrangements may be classified as embedded leases. Entities must carefully assess their lease and nonlease components, contract terms, and substitution rights to ensure proper classification and recognition under the new guidance. The transition to the new model requires careful planning and analysis, with potential impacts on financial statements, operational decisions, and business processes.