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Jun 18 2011

Lease Accounting Update June 2011

The Boards continued their deliberations this week without any major changes to their previous tentative conclusions regarding lessee accounting. This reaffirms the decisions to have all leases (except those defined as short term) recognized on the balance sheet similar to a finance lease approach and to have an accelerated method of expense recognition using the effective interest method combined with a separate straight line amortization of the right to use asset. It is still uncertain whether comments will be formally solicited on the revised Exposure Draft but the Boards are reaffirming their time line to have this project completed by the end of 2011.

Our View

Although there have been changes to certain proposals in the areas of variable lease payments and non-lease components, the basic principles contained in the original Exposure Draft remain in place. It continues to be critically important for lessees to prepare for what appears to be inevitable changes to lease accounting. Preparation should include data gathering and accumulation of this data in a technology tool that will allow ease of manipulation of the data and reassessment of initial conclusions if economic factors change. However, lessees should take this opportunity to focus beyond just the accounting requirements. Look for ways in which more efficient day to day management of the property portfolio can be coupled with meeting the needs of the new accounting requirements.