Feedback Sought for FASB/IASB Lease Accounting Proposal

May 22nd 2013
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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, DC–based 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.

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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Replies (4)

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By George Azih
Jun 25th 2015 20:11 EDT

As an auditor, I have actually seen companies make bad business decisions related to leases just to ensure that the transactions remain off-balance sheet. I agree when opponents of the proposed
say that "all leases are not created equal." However, one thing that ALL leases do is they create an obligation to make payments. Last I checked, that was the definition of a liability. And if liabilities do not go on the balance sheet, where do they suggest they go???

Thanks (0)
Replying to Brad Heck:
By Bob Court
Jun 25th 2015 20:11 EDT

The current rules incentivize companies
to structure leases on the basis of accounting treatment (keep off
balance sheet) rather than making a good business decision (appropriate
financing terms and end of lease provisions).

The new rules will force companies to understand the true financing cost
of their leases. What’s wrong with that? When they do, they will be
shocked to learn the effective rates of interest and hidden fees
embedded in leases are outrageous. Head will roll when companies learn
the true cost of commitments made by their managers and lazy thinking
finance departments.

Have you ever seen a lease with better terms than a straight forward
bank loan? Leasing companies con their clients into thinking there is
something magic about leases, when in reality IT”S JUST FINANCING.

Inside companies, managers use leases to evade their capital budget
limits and ignore the fact the leases are long-term financing

The new accounting rules are long long long overdue. The leasing
companies are scared, and for a good reason. That is why they are
trashing the new rules.

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By Bob Court
Jun 25th 2015 20:11 EDT

The Equipment Leasing and Finance Association is afraid of the truth.
Leases are just horribly expensive financing. The new rules do improve and simplify
lease financial reporting any way you look at them..

From the Journal of Accountancy today-

“Indeed, less than four hours after FASB and the IASB formally announced
the revised proposal, the U.S. trade organization ELFA (the Equipment
Leasing and Finance Association) had issued a news release saying the
proposed model would not significantly improve financial information and
would not faithfully depict the economics of equipment leases.”

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By benjamin
Jun 25th 2015 20:11 EDT

operating leases are the major source of financing , so definitely they create obligations, my recommendation is to create an extra table on the notes of annual report about the impact of capitalized operating leases on assets , liabilities and income statement , but also and to certain profitability and liquidity ratios . that is also my dissertation's topic!!!!!

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