International Accounting Standards Board (IASB) Chairman Hans Hoogervorst on Thursday acknowledged the converged lease accounting proposal is bound to be unpopular with many companies.
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.
In a telephone conference with reporters, Hoogervorst and FASB Chairman Leslie Seidman discussed key aspects and challenges associated with the lease accounting proposal. Here are excerpts from the discussion:
Hoogervorst, on whether the leases project has been challenging: “Obviously, this standard is not a very popular one. Not many of our standards are very popular, but this is probably going to be, among preparers, one of the least popular. Because generally companies like off-balance-sheet financing, and this is going to put an end to a major part of it.
“This is not an easy standard—it’s not really easy to define what a lease precisely is. It is not clearly a service. It is not 100% financing. It’s somewhere in between. So it was also conceptually a very difficult standard. And given that fact, I think the fact that the two boards have managed to stay together is quite an extraordinary achievement. And I really hope having come so far that we will remain converged until the end.”
Seidman, on FASB’s 4–3 vote to issue the revised proposal: “We had four of our board members vote in favor of the proposal. Three of our board members offered alternative views on various aspects of the proposal. And I will share with you that they have different reasons for their alternative views.
“I think that some of our board members believe that there should have been one approach to this, very similar to the approach that we put forward in the original exposure draft, and they simply weighed the feedback differently than the majority of our board and the vast majority of the IASB board in terms of how to address those concerns.”
Hoogervorst, on the timeline for the project: “The deadline for comments is the 13th of September. That means we can start redeliberations toward the end of this year, and we should be able to get a standard out in 2014. And then we will have to discuss the effective date, which will obviously be later than that. But we haven’t discussed that yet. But the most important thing is that I think we should be able to finish up this standard in 2014, and, hopefully, in the first semester.”
Seidman, on the varied input the boards received from investors: “One thing that we have heard consistently throughout this project from investors is that leases represent valuable rights and obligations that belong on the balance sheet. The different points of view have to do with how to best represent that in the income statement and the cash statement. And through our discussions with investors, they, like many other stakeholders, have diverse points of view about that.
“So we did conduct a great deal of outreach during this last round of commentary, and we heard support for one approach from some investors, and yet they didn’t agree on which approach. So the boards took under advisement that feedback, along with the feedback we received from other stakeholders, and ended up with an approach that distinguishes on the income statement and the statement of cash flows, the best way to present some leases which transfer a significant amount of the value and capacity of the underlying lease asset from those that only transfer an insignificant amount.”
Note: FASB and the IASB will hold a live webcast on the leases project from 10:30 to 11:30 a.m. EDT on Monday. U.S. participants will be eligible for up to one hour of CPE credit. To register, click here.
—Ken Tysiac (firstname.lastname@example.org) is a JofA senior editor.