Lease Accounting Update December 2012

By | December 16, 2012

There has not been much mention over the last few months about the FASB and IASB Boards (“the Boards”) Joint Project which would result in significant changes in the manner in which leases are accounted for. The Boards have instructed the staff to revise the Exposure Draft to incorporate the tentative conclusions that have been reached by the Boards. The revised Exposure Draft is expected to be issued in the first quarter of 2013.¬†Interested parties should review the revised Exposure Draft carefully to evaluate the changes to the original document, however, we believe¬† that most of the controversial issues have been discussed and agreed to by the Boards. All leases, except short term leases, will have to be reflected on the balance sheet of lessees and amortized in one of two ways, depending primarily upon the nature of the underlying asset being leased. The key consideration for the amortization method to be used would involve whether the lessee acquires or consumes more than an insignificant portion of the leased asset over the lease term. The presumption is that leases of property would be classified as straight-line leases unless there is evidence that a major portion of the property is consumed by the lease. Conversely, leases of equipment would be presumed to have accelerated amortization unless there is evidence that only an insignificant portion of the leased equipment is consumed.

Due to lack of visibility about these proposed changes over the last few months, it is easy to overlook the significance of the changes and the potential impact that they will have on lessees’ financial statements. The Boards have not provided any guidance on the proposed effective date for these changes; we hope that the revised Exposure Draft will provide additional insight on this issue. But going forward, lessees should keep in mind that any lease that commences in 2013 and has more than a five year term will probably have to be reflected on the lessees’ balance sheet at the time of the adoption of the new accounting standard.