LEASE ACCOUNTING...THE RE-DELIBERATIONS CONTINUE...

 

In August 2010 the FASB and the International ASB issued the now famous exposure draft that proposed to fundamentally change the accounting for lease arrangements. Their original plan was to garner feedback and comments and then to issue final regulations in June 2011.

In a rare move, on July 21, 2011 the boards announced their intention to re-expose the lease proposal. In their announcement they acknowledged that they had not concluded their deliberations. This is why they could not set a date as to when the second exposure draft will come forth. But they explained that re-deliberation decisions taken to date were different from those published in the original exposure draft, and they knew that a re-exposure was warranted.

The re-deliberations have continued since July, and lease accounting is on the agenda for the joint meeting this month (October). The goal is to issue the revised exposure draft in November 2011, with an expected 120 day comment period, followed by a final standard to come out in mid-to- late 2012. This timeline makes it likely that the new effective date would now move to 2016.

There are only two constants in the re-deliberations.

1. The lessee recognizes an asset and a liability for all lease contracts. The asset represents the lessee's right to use the asset.

2. Rent expense is no longer recognized. It is replaced by amortization of the right to use asset, and interest expense. Note that (2.) means that the total expense in the earlier years under current operating lease accounting (typically a straight lined expense) will be a higher interest expense as that previously recognized in earlier years.

The re-deliberations are really focused on four areas.

1. Definition of a lease (what is covered under these rules)
2. Lease term
3. How to handle contingent payments
4. What should the lessor accounting model look like

The re-deliberations have definitely had a constant and positive theme..."KISS" (Keep it simple...)

We will continue to keep our readers posted on the developments in this area. If you would like a more in depth narrative of the state of play of any or all of the four areas of continued re-deliberation, please feel to let me know. My personal favorite area, just so you know, is lease term. Don't get me started...!

I hope you enjoy the October 2011 edition of our Nonprofit newsletter.

 

Lewis Sharpstone
Partner & Nonprofit Practice Leader