Extracts from relevant Accounting Standards for Private Enterprises (ASPE)
Section 3065, Leases, paragraphs 3065.05, 3065.11-13, 3065.36, and 3065.44-.50
Section 3065 establishes the accounting standards for different types of lease transactions. Under Section 3065, the standard adopts the view that property has benefits and risks associated with its ownership. The standard also adopts the view that a lease that transfers substantially all of the benefits and risks of ownership to the lessee is in substance an acquisition of an asset and an incurrence of an obligation by the lessee and a sale or financing by the lessor. Benefits may be represented by the expectation of profitable operation over the property’s economic life and of gain from appreciation in value or realization of a residual value. Risks include possibilities of losses from idle capacity or technological obsolescence and of variations in return due to changing economic conditions. When thinking of climate-related risks and opportunities, risks may include events leading to changes in the classification of a lease, rent concessions, or impairment of a lease obligation.
Classification
Climate-related risks may cause a lessee or lessor to renegotiate the terms of a lease resulting in a capital, sales-type, or direct financing lease being replaced by an operating lease or vice versa. Paragraph 3065.11 notes that a renewal, an extension, or a change in the provisions of an existing lease shall be considered as a new lease and classified in accordance with paragraphs 3065.09-.10 and 3065.45. Therefore, a lessee and lessor must determine if the new lease terms change the classification of the lease or if it remains the same as the original lease. If the classification of the lease changes from a capital, direct financing, or sales-type lease to an operating lease, a net adjustment is included in income for the period as described in paragraphs 3065.12-.13.
Rent Concessions
As a result of a climate-related event such as a natural disaster that causes business disruption, an enterprise may receive a concession on its rent. Section 3065 states that when a rent concession results in a deferral of payments, and not a change in the total payments of a lease obligation, there is no change in the accounting treatment for the lessee or lessor. If the rent concession results in a waiver of payments, an entity recognizes the reduction in total payments in net income in the period to which the lease payments relate. A lessee and a lessor continue to account for the lease consistent with the terms of the original lease contract.
Impairment
Section 3065 states that, at the end of each reporting period, an entity shall assess whether there are any indications of impairment among each direct financing lease and sales-type lease, as well as operating lease receivables (the lease assets) or group of similar lease assets. When there is an indication of impairment, an entity shall determine whether a significant adverse change has occurred during the period affecting the expected timing or amount of future cash flows from the lease asset or group of assets.
Paragraph 3065.48 notes that indicators of impairment include a significant adverse change in the technological, market, economic, or legal environment in which the lessee operates. (For example, a sharp decline in the price of a commodity may cause economic instability in the lessee’s industry or have an adverse effect on other entities in a region that is dependent on the lessee's industry.) This is particularly important when considering potential climate-related risks that are indicators of impairment.