FASB Issues Lease Accounting Guidance

A new staff position requires companies to account for the "economic reality" of leveraged leases.
Marie LeoneJuly 13, 2006

Come December, companies will be required to recalculate their leverage leases if the timing of tax benefits affect corporate cash flows, says new guidance released Thursday by the Financial Accounting Standards Board. The FASB Staff Position (FSB) revises FASB Statement No. 13, Accounting for Leases.

FAS 13 requires that a lease should be recalculated when a change in an important assumption affects net income. One such change would be the timing of cash flows relating to income taxes generated by a leveraged lease.

In its guidance, FASB notes that many leveraged leases provide significant tax benefits to the lessor, and leveraged lease accounting is significantly influenced by the cash flows between that lease holder and the taxing authority. So, a change in the timing and amount of those cash flows would be expected to change the economics of the transaction, and therefore should be reflected in the financial statements of the lessor.

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The FSB “reflects our belief that accounting should fully reflect economics of a transaction,” commented FASB Member Edward Trott in a statement announcing the amendment. In other words, explained Trott, any changes in either the timing or amount of the cash flows associated with leveraged lease transactions will be “now be properly reflected in the financial statements.”