The Financial Accounting Standards Board and the International Accounting Standards Board have released for comment a revised exposure draft proposing significant changes to the standards for accounting for leases.
The new Proposed Accounting Standards Update, Leases (Topic 842) — A revision of the 2010 Proposed FASB Accounting Standards Update, Leases (Topic 840), would create a new, converged approach to lease accounting that would remove the old distinction between operating and capital leases, and require instead that all assets and liabilities arising from leases be recognized on the balance sheet.
How leases with terms of more than 12 months are treated will now depend on how much of the economic benefit of the underlying asset the lessee is expected to consume, which in practice will generally come down to whether it’s a lease for real estate, including land and buildings, or for other property, such as equipment, aircraft or trucks. (For leases of under 12 months, the preparer can elect not apply the proposed standard.)
“Leasing is a very important source of financing,” said IASB Chair Hans Hoogervorst in a conference call with reporters. “There are $800 billion in new leasing contracts every year, the majority of which are recorded as operating leases, so they don’t go on the balance sheet. In fact, many are specifically structured specifically to be kept off the books. We don’t think that’s acceptable -- it’s important to get the leases on the balance sheet.”
The current operating-versus-capital-lease standards have been criticized for not accurately representing leasing transactions, and for allowing too many lease assets and liabilities to go unrecognized in financial statements. In response to concerns expressed by the users of financial statements, the boards began developing new proposals in 2005.
The new exposure draft reflects the boards’ redeliberations and stakeholder feedback on an earlier exposure draft that was put out for comment in 2010.
One of the main distinctions between the earlier ED and the new release was that the prior draft would have required the same treatment for all leases, while the current version offers the dual approach that offers different treatments to reflect the underlying economics of the transaction.
The new draft also includes a number of revisions that are aimed at making the standards less expensive and less complex to apply, including the exception for short-term leases; the removal of the requirement to include most variable lease payments in liability, due to the complexity of estimating them; and simplifications to the accounting for renewal options.
The boards expect comments by mid-September, and hope to begin redeliberations by the end of the year, and finalize a standard in 2014.
In terms of the potential transition to the proposed standards, “We will be requiring the application of the proposals to all existing lease arrangements,” said Seidman. “We will not be grandfathering any lease arrangements. … For operating leases, we tried to simplify the transition to make it easier to get the leases on the balance sheet.”
“We plan to conduct joint field work with the IASB during the comment period,” Seidman noted during the conference call, including webcasts, workshops, meeting with stakeholders and roundtables. FASB has also scheduled a specific meeting with the Private Company Council.
The details
For most leases of property, the proposal would require lessees to recognize a right-of-use asset and a lease liability, initially measured at the present value of the lease payments, and also recognize a single lease cost, combining the interest on the lease liability with the amortization of the right-of-use asset, on a straight-line basis.
For most leases of assets other than property, the lessee would recognize a right-of-use asset and a lease liability, initially measured at the present value of lease payments, and would recognize and present the interest on the lease liability separately from the amortization of the right-of-use asset.
The boards have also proposed new accounting for lessors, which follows similar distinctions based on the degree of consumption of the underlying leased asset.
While the boards are quick to point out that this is a converged standard, FASB’s version does have two minor points of difference: The U.S. standard-setter has “tentatively” decided that private companies and non-public nonprofit organizations can elect to use a risk-free rate when discounting their lease liabilities, and they don’t have to disclose a reconciliation of lease liability from the beginning of the year to the end of the year.
The boards will host a live webcast on the revised exposure draft on Monday, May 20, at 10:30 a.m. EST. Attendees can register for the webcast
Comments and feedback are requested by Sept. 13, 2013.
