Feedback Sought for FASB/IASB Lease Accounting Proposal

By Jason Bramwell

Interested individuals and organizations have until September 13 to offer their input on a revised exposure draft  Proposed Accounting Standards Update - Leases (Topic 842)  from the Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB), which are proposing several new changes to the guidelines for lease accounting.
 
One group that plans to send a comment letter to the FASB and the IASB on the proposed changes is the Washington, DCbased Equipment Leasing & Finance Association (ELFA), a trade association that represents financial services companies and manufacturers.
 
While the ELFA supports the effort by the FASB and the IASB in establishing a working standard that applies to the assets and liabilities arising from lease transactions, the association has several concerns about the new proposal.
 
"The lease accounting model as proposed will not result in a significant improvement in the quality or reliability of financial information, will not faithfully depict the economics of equipment leases, is unduly complex, and will impose a compliance burden on lessees," said ELFA President and CEO William Sutton in a written statement
 
"Lease financing is a critical means of capital formation for US businesses through the acquisition and investment in capital plans and equipment and real estate," he continued. "ELFA's overriding concern is that any standard that replaces SFAS No. 13 should improve the clarity in financial reporting of these transactions without undue burden on businesses from an accounting or a financial standpoint."
 
Leases (Topic 842) aims to improve the quality and comparability of financial reporting by providing greater transparency about leverage, the assets an organization uses in its operations, and the risks to which it is exposed from entering into leasing transactions, the FASB stated in a press release.
 
"The proposal is responsive to the widespread view of investors that leases are liabilities that belong on the balance sheet," FASB Chairman Leslie Seidman said in a written statement. "The boards revised the original proposal to distinguish between different types of leases for income statement and cash-flow purposes, in response to feedback from stakeholders."
 
The FASB and the IASB developed the new proposal after considering stakeholder responses to their discussion paper, Leases: Preliminary Views, which was issued in March 2009, and the proposed FASB accounting standards update, Leases (Topic 840), which was issued in August 2010.
 

Questions on Lessee/Lessor Accounting

The FASB has posed twelve questions for public comment on proposed changes to the standards for lease accounting. Two of the twelve questions deal with lessee accounting and lessor accounting. Those two questions are:

Lessee Accounting
Do you agree that the recognition, measurement, and presentation of expenses and cash flows arising from a lease should differ for different leases, depending on whether the lessee is expected to consume more than an insignificant portion of the economic benefits embedded in the underlying asset? Why or why not? If not, what alternative approach would you propose and why?
 
Lessor Accounting
Do you agree that a lessor should apply a different accounting approach to different leases, depending on whether the lessee is expected to consume more than an insignificant portion of the economic benefits embedded in the underlying asset? Why or why not? If not, what alternative approach would you propose and why?
 
The public comment period ends September 13.
 
What Changes Are Being Made?
The existing standards have been criticized for failing to meet the needs of users of financial statements because they do not always provide a faithful representation of leasing transactions.
 
According to the FASB, a majority of leases are not currently reported on a lessee's balance sheet. The amounts involved can be substantial. Additionally, the existing accounting models for leases require lessees and lessors to classify their leases as either capital leases (such as a lease of equipment for nearly all of its economic life) or operating leases (such as a lease of office space for ten years) and to account for those leases differently.
 
For capital leases, lessees recognize lease assets and liabilities on the balance sheet. For operating leases, lease assets and liabilities are not recognized by lessees on the balance sheet, according to the FASB.
 
Under the new proposal, lessees would have to recognize assets and liabilities for the rights and obligations for leases of more than twelve months. 
 
"A lessee and lessor would clarify leases on the basis of whether the lessee is expected to consume more than an insignificant portion of the economic benefits embedded in the underlying asset," the FASB stated in the exposure draft.
 
This differs from the 2010 exposure draft, which proposed that when determining how to account for leases, lessors would assess whether significant risks and benefits associated with the underlying asset are transferred to the lessee.
 
To better reflect the differing economics of lease transactions, the FASB and the IASB are proposing a dual approach to the recognition, measurement, and presentation of expenses and cash flows arising from a lease. Under the new proposal, lessees would report a straight-line lease expense in their income statement for most real estate leases. For most other leases, such as equipment or vehicles, lessees would report amortization of the asset separately from interest on the lease liability, according to the FASB.
 
The boards are also proposing disclosures that should enable investors and other users of financial statements to understand the amount, timing, and uncertainty of cash flows arising from leases, as well as recommending changes to how equipment and vehicle lessors would account for leases that are off-balance sheet. Those changes would provide greater transparency about such lessors' exposure to credit risk and asset risk, according to the FASB.
 
"At present, investors must take an educated guess to determine the hidden leverage from leasing by using basic disclosures in financial statements and applying arbitrary multiples," IASB Chairman Hans Hoogervorst said in a written statement. "It is clearly not in the best interests of investors to expect analysts and others to guess the liabilities associated with leases. [This] proposal will go a great distance toward improving the quality and comparability of financial reporting in this area."
 
Nigel Sleigh-Johnson, head of the financial reporting faculty at the Institute of Chartered Accountants in England and Wales (ICAEW), said in a written statement that the lease accounting standard will eventually have a major impact on many businesses around the world.
 
"The impact will be most noticeable for companies with operating leases for major assets," he added. "Companies in certain sectors  such as shipping, the airline industry, mining, and construction  are likely to be more affected than others, but getting all leases longer than twelve months onto the balance sheet may mean that many types of companies will face data-gathering issues."
 
Comments Encouraged
There are three ways individuals or organizations can comment on the proposal by September 13:
  1. Using the electronic feedback form available on the FASB website.
  2. E-mailing a written letter, which should include File Reference No. 2013-270.
  3. Sending written comments to: Technical Director, File Reference No. 2013-270, FASB, 401 Merritt 7, PO Box 5116, Norwalk, CT 06856-5116.
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