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FASB Takes a Step Back on Proposed Lease Accounting Standard Changes

by Mary Stucke

If you have been “enjoying” following proposed changes to accounting for leases (who doesn’t?), you may have been thinking to yourself:

  • This is going to hurt my Company’s debt to equity ratio
  • This is going to make it harder to obtain financing
  • This is going to cost my Company time and money
  • This is going to make my job much harder

If you have had any of these thoughts, you are not alone, and FASB has taken notice.

The FASB had previously issued an Exposure Draft on August 17, 2010 which was basically going to eliminate the concept of operating leases and set forth new standards with a single method of accounting for all leases where a right of use asset and lease liability is recorded for all leases, similar to current accounting rules for capital leases.

At a joint Board meeting between the FASB and the IASB on February 17, 2011, the Boards breathed new life into operating lease accounting.

The Boards tentatively decided to identify a principle for identifying two types of leases for both lessees and lessors, with different profit and loss effects, as follows:

  • A finance lease with a profit or loss recognition pattern consistent with the proposals in the Exposure Draft.
  • An other-than-finance lease with a profit or loss recognition pattern consistent with an operating lease under existing IFRSs/U.S. GAAP.

Another significant decision at the February 17, 2011 meeting was related to wording on renewal options.   The Exposure Draft had called for lessees with options-to-renew to capitalize lease obligations for renewal periods that were “more likely than not” to occur.  The Boards have now proposed this be changed from “more likely than not” to “reasonably assured.”  This should help make the renewal assessment less burdensome and easier to estimate.

I think there are two main takeaways from this most recent joint Board meeting on lease changes:

(1) The gurus at the FASB aren’t completely crazy, and
(2) If you complain about something enough, people will listen.

The FASB Action Alert from the joint Board meeting has additional details on the discussion.  Click here to view.

The current Project Update on Leases can also be found on the FASB website. Click here to view.

This entry was posted in Audit & Tax Talk and tagged Accounting. Bookmark the permalink.

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