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FINANCIAL REPORTING

Converged leases project struggles to maintain momentum

 

By Ken Tysiac
May 3, 2013

Moody’s Investors Service Managing Director Mark LaMonte offered a blunt assessment of the converged lease accounting proposal that is expected to be issued soon.

“My personal view, I wouldn’t mind seeing this go away,” LaMonte said Thursday at the 12th annual Baruch College financial reporting conference in New York City.

FASB and the International Accounting Standards Board (IASB) are battling significant objections as they attempt to move the leasing project through another public exposure. While the revenue recognition project that’s due to result in a final standard by the end of June has been touted by many as a model effort, the boards have struggled to maintain momentum in the leasing project.

Like revenue recognition, leasing is a critical issue for a huge number of organizations and attracts tremendous interest from the financial reporting community. But the problem with developing a leases standard is all leases are not created equal, so it is difficult to come up with overarching accounting rules that govern them all.

So the boards came up with two expense patterns for lessees to place leases on the balance sheet. The forthcoming proposal will call for lessees to use an interest and amortization approach to expense leases on items that depreciate significantly during the life of the lease—such as equipment and vehicle leases.

Leases on items that do not depreciate will follow a straight-line expense pattern. For leases with a maximum possible term of 12 months, including any options to renew, lessees would not recognize lease assets or liabilities. On these short-term leases, lessees would recognize lease payments in profit or loss on a straight-line basis over the lease term.

LaMonte said getting a full understanding of companies’ lease obligations is easier now for investors than it will be under the standard that is being reproposed.
 
“Ultimately, what’s going to end up back on the balance sheet as a result of applying the standard really isn’t going to satisfy many users of financial statements,” LaMonte said.

Leslie Seidman, who chairs FASB, said the difficulty with developing the leasing standard is that investors have diverse points of view on how to improve it. But she said there was a common—although not unanimous—belief among investors FASB surveyed that putting lease obligations on the balance sheet will represent an improvement.

“So this is the life of a standard setter, to weigh all this input and try to come up with a proposal,” Seidman said at the Baruch conference. “I don’t want you to be left with the impression that the feedback we received broadly from investors is, ‘Do nothing.’ ”

Nonetheless, support for the project is tenuous. FASB’s decision last month to move forward to re-exposure passed by a 4–3 vote, with Seidman casting the deciding vote. PwC partner John Bishop said clients were more inclined to accept the significant implementation costs before the model evolved toward something that looks more similar to today’s leasing standards.

Viacom Controller Katherine Gill-Charest said the model is good from a preparer’s point of view because it’s simple, but understood LaMonte’s disappointment in the split-recognition model.

“One of the things you were trying to get out of this [model] has gone away,” she said. “But I think it comes back to trying to apply one leasing standard to something called a ‘lease’ that could be serving very different purposes.”

Ken Tysiac (ktysiac@aicpa.org) is a JofA senior editor.

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