The issuance of the final standard for lease accounting will likely be delayed until the first half of 2012. At the least, there will be another draft version of the new standard made available for review and comments. There still has not been any decision made regarding the effective date of the new standard.
The Boards continue to reaffirm balance sheet recognition for most leases.
Current operating lease accounting can continue to be used for short-term leases. Short-term leases are defined as those which have a maximum possible lease term, including any options to renew, of 12 months.
Except in limited circumstances, non-lease components, including payments for services and executory costs (insurance, taxes and maintenance), would be separated from the lease payments and would be accounted for similarly to the way that they are currently. The allocation between lease and non-lease components would be a new process for many lessees and may require significant judgment.
The determination of the lease term is critical. Currently, the lease term is defined as the non-cancelable period, plus any options periods where there is a significant economic incentive for the lessee to extend or not terminate the lease.
Changes in certain circumstances would require reassessment of the original accounting judgments. Reassessment would be required if the conclusions reached on lease term and purchase options, among other things, changed based upon changes in the original conclusions regarding significant economic incentives.
The Boards reaffirmed their position that contingent rent based upon performance or usage would be charged to expense as incurred.
This project continues to progress, albeit at a much slower pace than originally projected. Although some of the complexities contained in the original Exposure Draft have been eliminated, the basic principle of balance sheet recognition for all leases (except short-term leases) has been maintained. There are still a number of areas that will be complex and subjective to apply, including determination of lease term, non-lease components and the requirements to reassess due to certain changing conditions. Companies will have to develop processes and procedures that will allow them to review lease terms, identify critical dates and reassess original conclusions. Having comprehensive lease information readily available is crucial. We continue to believe that the technology tool that we are developing will provide the user with the critical data that is necessary not only to meet the needs of this new accounting requirements but just as importantly to manage the lease portfolio in an efficient and effective manner.