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FINANCIAL REPORTING / MANAGEMENT ACCOUNTING

Lessors, lessees see difficulties in proposed changes

 

By Ken Tysiac
January 29, 2014

Businesses expect difficulties in implementing proposed changes to lease accounting rules, according to a new Deloitte survey.

FASB and the International Accounting Standards Board (IASB) have resumed deliberations in the difficult convergence project, which inspired significant opposition after the release of a second exposure draft in May.

Final rules could be written in 2014, although FASB Chairman Russell Golden has said he expects changes based on the feedback the boards received.

Almost four out of five (79%) executives surveyed by Deloitte said they expect implementation of the proposed changes to be somewhat difficult or extremely difficult. Deloitte surveyed 138 executives at companies that are lessees or lessors.

Compared with a 2011 survey, which followed the first exposure draft, concerns have increased for lessees and decreased for lessors, according to Scott Hileman, a director of Deloitte Transactions and Business Analytics LLP.

“Given the standard’s complexity, the financial impact, and the significant data challenges posed, companies should start getting their houses in order,” Hileman said in a press release.

Executives expect the changes to have the greatest impact on their financial reporting. Balance sheets (58%) and financial statement disclosures (53%) were identified most often as the areas that would be affected. Potential effects of the proposed standard, according to survey respondents, include:

  • Fewer renewal options and shorter lease terms in real estate. More than half (58%) of real estate lessors said the proposed standard would result in real estate lessees seeking to reduce or eliminate renewal options. More than one-third (39%) of real estate lessees agreed. About 40% of real estate lessors and lessees expect the proposal will lead real estate lessees to try to reduce lease terms.
  • A shift from leasing to purchasing. Fifty-three percent of equipment lessees and lessors said the proposal would make companies at least somewhat more likely to purchase equipment instead of leasing. Forty-one percent of real estate lessors and lessees said the proposal would make companies more likely to purchase instead of lease single-tenant, occupied facilities.
  • Reporting burdens. Executives said the proposed standard would create a significant reporting burden on lessees of real estate (88%) and equipment (85%) as well as on lessors of real estate (71%) and equipment (73%).


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

 

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