Lease Accounting Update November 19, 2013

By | November 19, 2013

In our Comment Letter to the FASB and IASB of September 18, 2013, we cited four main points as follows:

  • Defer the resolution of the lessor accounting issue – this is by far less important than the concerns over lessee accounting.
  • Focus on balance sheet recognition for lessee accounting and bring the issue to as speedy a resolution as possible. Recognizing leases on the balance as an obligation of the lessee has strong conceptual underpinning.
  • Revisit the tentative conclusion of establishing two types of leases – one for real property and another for equipment. This concept is too confusing and introduces too many subjective judgments. Settle on the “standard” interest based amortization method which has a conceptual framework.
  • Broaden the accounting policy exemption for short-term leases to allow for a maximum possible contractual term of 24 months.

In news reports today about recent comments from the chairmen of both the FASB and IASB, it appears as if our points are being embraced for the most part. There seems to be a consensus that lessor accounting is not “broken” and, therefore, why try to fix it. On lessee accounting, the IASB is very firm about balance sheet recognition of the liability (not additional footnote disclosure as some have suggested) and while the FASB is not as strongly convinced on the point, it seems as if they are ready to concede that this is an obligation that must be recognized on the balance sheet. The issue about two lease types is being addressed again because many investors and financial statement preparers are concerned about the complexity involved.  There has been no apparent mention of broadening the short term lease “exemption” but clearly there will be some additional changes made to eliminate complexity and this could be an area for consideration.

Hopefully, we will see a consensus reached in the first quarter of 2014.