FASB Proposes A Change To Lease Accounting

As influential House Energy Committee Chairman Billy Tauzin called for a review of accounting rules “across the country and across corporate boards,” the Financial Accounting Standards Board (FASB) continued its relentless drive to strengthen the standards. On February 15, 2002, FASB announced the release of a revised limited version of an exposure draft (ED) entitled Rescission of FASB Statements No. 4, 44, and 64 and Technical Corrections—Amendment of FASB Statement No. 13. The new ED supplements a previous ED dated November 15, 2001 and proposes an important change in lease accounting.

Together, the two EDs propose to amend four Statements of Financial Accounting Standards (FAS):

FAS No. 4 - Reporting Gains and Losses from Extinguishment of Debt
FAS No. 13 - Accounting for Leases
FAS No. 44 - Accounting for Intangible Assets of Motor Carriers
FAS No. 64 - Extinguishments of Debt Made to Satisfy Sinking-Fund Requirements

Specific proposed changes include the following:

  1. As described in the first ED, companies will no longer be required to classify gains and losses from the extinguishment of debt as extraordinary items, but they will still be allowed to use this accounting treatment in certain circumstances.

  2. As described in the new ED, the accounting for certain types of leases will change, (i.e., sale-leaseback transactions and lease modifications with economic effects similar to sale-leaseback transactions).

The reason for two EDs instead of one is because the second has its roots in the comment letters for the first. Commentators suggested changes they felt would improve financial reporting by eliminating inconsistencies in the various standards. FASB agrees in theory. But it also recognizes that some companies might have structured their leases differently, if the proposed accounting changes had been in effect at the time of the transaction. To ensure these substantive changes get a fair hearing, FASB decided to expose them for public comment as part of its “due process.”

Comments on the revised ED are due by March 18, 2002.

-Rosemary Schlank

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