Joint FASB/IASB Roundtable on Leases

By | September 26, 2013

Earlier this week, I attended one of the Joint FASB/IASB Roundtable session on Leases held in Norwalk CT. There were only about 15 attendees from those who submitted comment letters which was somewhat surprising since there were close to 600 comments letters submitted.  Numerous FASB and IASB Board members and staff were also in attendance. There was a thorough discussion of the questions on which the Boards had requested comment. Here are the most important highlights that I took away from the meeting.

Similar to the general sentiments expressed in the comment letters, there was very little support expressed for the proposed changes as detailed in the Revised Exposure Draft (“Revised ED”). Many of those in attendance were very concerned about the complexity of the proposals and the amount of effort it would take to enact the changes, as it relates to lessees. Some questioned whether the accounting as proposed would actually present more useful information to the financial statement users and financial analysts. But certain FASB/IASB Board members responded to that assertion indicating that the metrics currently being utilized to estimate the impact of operating leases was significantly faulty. As for the change to lessor accounting, there was somewhat less controversy and some rather legitimate questioning of whether the lessor accounting should even be considered for change. There seems to be general consensus that lessee accounting is by far the major issue.

Interestingly, when it came to a question of whether all leases should be recognized on the balance sheet using a Right of Use asset and Lease Liability model, virtually all had to agree that this would be a better approach. So the issue seems to be one of how to apply this model in a less complex manner and how certain unique industry matters will be addressed, such as those relating to the oil and gas industry. As to the dual approach indicated in the Revised ED whereby most property leases would recognize expense on a straight-line basis and most equipment leases would recognize expense on an accelerated basis, some of those attending from the public accounting firms indicated that there is little , if any, technical support for this type of approach and how the straight-line amortization is accomplished. As one would expect, the real estate industry representatives were more supportive of any method that resulted in straight-line expense recognition for real estate leases.

So what will be the ultimate resolution of these discussions that have been ongoing for more than three years? Certainly, that is still an open question. However, it is interesting that most of the attendees were hard pressed to argue that the liability for lease obligations should not be recognized on the balance sheet. Our prediction is that the accounting change will be adopted with an additional effort to eliminate some of the complexities that are contained in the Revised ED (such as some of the reassessment requirements) and with an extended implementation period that allows additional time for preparation. But financial statement preparers will have to accept that the calculations will of necessity involve judgments and will also require a significant time commitment.