Standards-Setters Near Leasing Finish Line

FASB and IASB are moving closer towards a converged final standard on how to account for leases. But several sticking points remain.
Kathy HoffelderMay 16, 2013

Corporations that lease equipment or real estate will have until September 13 to make their voices heard about the revised exposure draft, Leases (Topic 842), released today by the Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB).

Today’s move, involving one of the most complex and controversial areas in accounting, signifies another step towards a global convergence of accounting standards. With a final global standard on revenue recognition due this summer, the boards have been hard pressed to come up with a unified approach regarding lease accounting to fill out the convergence agenda.

Satisfying all the players in the lease-accounting game is a tall order. Investors have clamored for years for more transparency in how corporations account for lease transactions, prodding companies to estimate the impact of leases on their financials. 

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Many corporations, in turn, have balked at the prospect of more record-keeping and disclosure under the new standard. Current wording leaves questions about how to account for leases in a bankruptcy or what to do if there are leases of multiple assets, for instance, they contend. 

“Obviously, this standard is not a very popular one,” said Hans Hoogervorst, chairman of the IASB on a press call today. “It is not really easy to define what a lease precisely is. It is not clearly a service. It’s not 100 percent financing. It’s somewhere in between—so it was also conceptually a very difficult standard.”

For its part, FASB agreed to move forward with the release of the exposure draft after a very close vote of 4-3 at a board meeting in April.   

Companies are already grappling with the prospect of more work. “The entities that have been following it closely realize the magnitude of the proposal,” said Rich Stuart, partner in the national audit standards group at McGladrey, an audit and accounting advisory firm. “Some have started compiling the information they would need to adopt the standard,” he noted, while others are taking more of a wait-and-see approach.   

Under the new proposal, corporate lessees would have to recognize assets and liabilities stemming from leases on their balance sheet, with the exception of leases of less than 12 months. “A lessee and lessor would classify leases on whether or not the lessee is expected to consume more than an insignificant portion of the economic benefits embedded in the underlying asset,” according to FASB.

In contrast, the boards’ 2010 lease accounting exposure draft (“Leases” (Topic 840)) called for a lessor to make an assessment as to whether significant risks and benefits related to the underlying asset are transferred to the lessee.

Some companies say the proposed standard, which calls for the accounting of the costs for equipment leases to be treated differently from real estate leases, should treat the two the same. Under the new proposal, real estate leases for lessees would qualify for straight-line expensing (in which a single lease expense is recognized over the life of a lease), while the costs of equipment leases would be accounted for in a front-loaded manner (in which larger interest charges occur at the beginning of a lease than at the end).  

Users of equipment leases are some of the most vocal opponents of the new standard’s front-loaded approach. William G. Sutton, president and chief executive officer of the Equipment Leasing & Finance Association, said in a statement today that “the lease accounting model as proposed in the long-awaited exposure draft will not result in a significant improvement in the quality or reliability of financial information, will not faithfully depict the economics of equipment leases, is unduly complex and will impose a compliance burden on lessees.”

Nick Cyprus, vice president, controller and chief accounting officer at General Motors, said in a comment letter last May to the boards that the proposed lease accounting approaches are costly and that leasing services should be separated from other language in the document. “Rather than continue to entertain the development of an accounting model focused on achieving an ‘even’ expense recognition pattern, we encourage the Boards to continue to ensure that the scope of leases is defined correctly such that services can be appropriately separated from the lease elements of a contract.”

Still, the boards say they are open to hearing different opinions. A series of Webcasts, roundtables and other outreach work is planned over the coming months to ensure comments are heard before the proposal becomes a final standard, which could be voted on by 2014 and made effective in the following years. FASB will have a particular session geared towards private companies related to lease accounting at a Private Company Council meeting slated for July.

“We’re making it as easy as possible for those smaller practitioners to make their voices heard during this process,” explained Leslie Seidman, chairman of FASB, on the press call.