FASB Adds Joint Lease Accounting Project with IASB

Concerns that current lease accounting does not accurate reflect the resources and obligations of lease transactions, the Financial Accounting Standards Board (FASB) on Wednesday officially added a lease accounting project to their agenda. The goal of the project, which is being conducted jointly with the International Accounting Standards Board (IASB), is to insure that investors and other financial statement users are given useful, transparent, and complete information about leasing transactions in financial statements.

“One of the initial steps will be to form a working group made up of interested parties with knowledge and expertise about a wide range of leasing arrangements,” Leslie F. Seidman, FASB member, explained in a prepared statement. “We are coordinating that effort with the IASB. We will also continue to seek input from our advisory councils and Investor Task Force.”

The FASB and IASB agreed that the first major milestone relating to this project will be a Preliminary Views document, which they plan to issue for constituent comment in 2008.

Leases serve a vital role in businesses around the world. The current U.S. accounting standard in this area, FAS 13, Accounting for Leases,, was established in 1976. While that standard represented a significant improvement at the time, lease arrangements have evolved considerably over the past 30 years and the standards are outdated. Today, leasing arrangements can vary from simple rentals of equipment to complex, tax-motivated arrangements involving real estate and other types of assets. Moreover, the current accounting standards in this area are complex and rules-based, which makes it possible to structure transactions to achieve desired accounting outcomes.

“The Board has been asked to take a fresh look at the current accounting standards on leasing for a few reasons, “ Seidman said. “First, investors are concerned that existing standards do no require balance sheet recognition of significant assets and liabilities arising from the leases. Second, current accounting guidance in this area is rules-based and voluminous. Accordingly, the goal of this project is to develop principles that would faithfully represent lease transactions in the financial statements of lessees and lessors and would reflect similarities and differences in the wide variety of leasing arrangements prevalent in today’s business environment.”

Before making this decision, the FASB consulted with its constituents, including the FASB’s Financial Accounting Standard Advisory Council (FASAC), its User Advisory Council (UAC), and the Securities and Exchange Commission (SEC) staff. Many of those constituents urged the Board to undertake a project, expressing the view that current lease accounting standards fail to provide complete and transparent information. In fact, the SEC staff formally raised issues with, and recommended improvements to this area as part of its June 2005 report to Congress on off-balance sheet arrangements as required by the Sarbanes-Oxley (SOX) Act of 2002.

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