Update on Lease Accounting

Update on Lease Accounting

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By: Jason Hart, CPA

On Thursday, May 16th, the Financial Accounting Standards Board (“FASB”) and the International Accounting Standards Board (“IASB”) issued a joint exposure draft which will dramatically alter the current accounting treatment for leases.

Doesn’t this sound familiar? Rewind back to March 2009 when the FASB and IASB issued very similar discussion papers outlining their thoughts on the lease project. Public discussion ended for these papers in July 2009, and the boards formally issued an exposure draft of a new lease standard 13 months later on August 17, 2010. The FASB and IASB then spent the next year and 11 months reading the hundreds of comment letters received, holding public forums around the world, and hosting webinars on its ‘progress’ with the new standard. We haven’t heard anything from the FASB and IASB on the lease project for nearly a year until last Thursday when the most recent exposure draft was released.

So, why the big delay? Did the Boards dramatically refine the previous exposure draft or reduce the impact on small and medium-sized businesses? … Not exactly.

The primary goals of the exposed lease standard continue to be:

  1. To create greater transparency about leverage and assets used in operations
  2. To create greater transparency about the effects of leasing transactions on cash flows
  3. To create greater transparency about the residual assets of leased assets for lessors draft proposes two separate leasing models:

The “greater transparency” will be accomplished by forcing nearly all leasing transactions onto the balance sheets of both lessees and lessors, and by increasing the disclosure requirements for all leases. The newly developed term “right-of-use asset” has been coined to represent the economic benefit that a lessee is entitled to under a leasing transaction. The exposure draft proposes two separate leasing models:

  1. Type A will cover leases for equipment. vehicles. and other similar assets with relatively short useful lives. Lessees will record a right of use asset and corresponding lease obligation liability based on the NPV of the lease payments. The asset will be depreciated and the obligation will be amortized, with interest expense recognized on the income statement. Lessors will record a lease receivable and a reduction to the leased asset down to its residual value. Interest income and profit (or loss) will be recognized on the income statement.
  2. Type B will cover real-estate leases where the lease term doesn’t typically span the leased asset’s estimated useful life. Lessees will record a right of use asset and corresponding lease obligation liability based on the gross value of the lease payments. The asset and liability will be amortized on a straight-line basis over the lease term. Lessors maintain the original value of the leased asset on its balance sheet, with lease income recognized on a straight line basis.

The Boards have modified the most recent exposure draft to respond to many of the criticisms it received in earlier versions, however the substance of their efforts has remained unchanged ……. to inflate balance sheets (okay, that was an editorial comment).

The good news is that the Boards have listened to the community forums and public comment letters and have made a few important concessions that were either vague or not present in earlier drafts:

  1. An option to exclude leases with a maximum term of 12 months or less
  2. The ability to exclude variable lease payments if they are not linked to an index or rate
  3. The ability to exclude renewal options unless significant economic incentive exists to exercise the option
  4. Some concessions on the disclosure requirements for non-public entities

The FASB and IASB opened a public comment period which will end on September 13,2013. The boards will be conducting more public outreach through round-table discussions and webinars from May through September 2013, prior to their final re-deliberations in Q4 2013. The final standard release and implementation dates have not yet been determined.

Questions? Contact your Keiter engagement team or Jason Hart.

About the Author

Keiter CPAs is a certified public accounting firm serving the audittax, accounting and consulting needs of businesses and their owners located in Richmond and across Virginia. We focus on serving emerging growth businesses and companies in the financial servicesconstructionreal estatemanufacturingretail & distribution industries and nonprofits. We also provide business valuations and forensic accounting servicesfamily office services, and inbound international services.

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The information contained within this article is provided for informational purposes only and is current as of the date published. Online readers are advised not to act upon this information without seeking the service of a professional accountant, as this article is not a substitute for obtaining accounting, tax, or financial advice from a professional accountant.


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