Lease Accounting Update January 2013: Lease Components in a Single Lease Contract

The FASB and the IASB (“The Boards”) met on January 30, 2013 to continue further deliberations on the Lease Accounting Project. The discussions were narrowly focused on the instances where multiple lease components are contained in a single lease contract. As examples, multiple pieces of equipment could be leased under a single lease contract, a single lease contract could contain both property and non-property components or land and building(s) could be leased under a single lease contract.  The central issue discussed revolves around whether individual lease components in a single lease contract must be accounted for separately. The Boards tentatively concluded that for components that are distinct from other goods and services in the lease contract and the components are not customized to meet the particular needs of the customer, those distinct components should be accounted for separately. A single lease that contains components (for example, property and non-property) that are customized and integrally related would be accounted for as a single lease contract. Land and building(s) contained in separate lease contract would be treated a single component and would not be allocated (a difference from current GAAP treatment).

For a lease contract that contains both property and non-property and must be accounted for as a single component, an additional issue deliberated was which lease classification test would apply in these circumstances. The Boards tentatively concluded that the lease classification of the primary (predominant) asset would determine the lease classification. Therefore, if the equipment was deemed to be the primary asset, the presumption would be that the accelerated amortization method would be used whereas if the property was deemed to be the primary asset, the straight-line method would be presumed to apply.

From the previous example, it is clear that any technology solution that a lessee chooses to employ to comply with the new lease accounting standard should be capable of tracking and accounting for both property and non-property (equipment) components. We at iLeasePro have anticipated this need and are developing our lease management and accounting technology product as an integrated solution for both property and equipment.

The Boards additionally indicated that they plan to issue a revised Exposure Draft (“ED”) by the end of March 2013 which will be open for comment for a period of time. Redeliberations and discussion of comments on the revised ED will begin in the second half of 2013.

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