December is a time to look back at the past year and look forward to a new year. So let’s do that with respect to the Exposure Draft regarding changes to the lease accounting being considered by the FASB and the IASB (“the Boards”).
The changes were formally proposed more than three years ago and an extensive revision to the original Exposure Draft (“the Revised Exposure Draft”) was published in May 2013 which eliminated some of the complexity of the original proposal but also introduced the concept of two types of leases and two types of amortization methods, principally depending upon the nature of the asset being leased. The Revised Exposure Draft has continued to meet with extensive resistance particularly with regard to United States financial statements preparers. The IASB and the international community seem much more inclined to accept the changes with the FASB more reluctant due to industry group and financial statement preparer feedback. There is strong concern about the overall complexity that continues to be inherent in the Revised Exposure Draft. There is also concern, particularly from some of the larger accounting firms, about the amortization method being proposed for most property (real estate) leases since the manner in which straight-line amortization is accomplished does not have any technical basis in accounting literature. Interestingly, when pressed about whether a lease is truly an obligation that should be reflected on the balance sheet of lessees, even those that are opposed to the proposed changes have a difficult time defending the existing accounting treatment for operating leases which keeps the obligation off-balance sheet. Some have suggested more footnote disclosure as a remedy but how this would be accomplished is not at all clear. Finally, many observers wonder why changes to lessor accounting are even being considered with the lessee issue since lessor accounting has never been considered particularly controversial.
So what do we expect in 2014? We believe that the Boards will go forward with the proposed changes – the issue of recognizing lease obligations on the balance sheets of lessees will override any objections. However, during the first quarter of 2014, the Boards will continue to discuss changes to the proposed standard and consider the following:
- Eliminate some more of the complexity, particularly with regard to definition of what is a lease and the criteria for reassessment;
- Revisit the issue of the two types of leases with two amortization methods (in many ways, this increases the complexity by injecting additional subjectivity);
- Revisit the accounting policy election for short-term leases by broadening the criteria to 24 or 36 months so that these leases do not have to be reflected on the balance sheet ; and
- Defer the issue of changes to lessor accounting.
We expect that a final standard will be issued in the second half of 2014 with a sufficiently long implementation period so that users have enough time to prepare for what will continue to be an extensive undertaking.