Editor's note: On April 14, FASB and the IASB said the priority projects on revenue recognition, leases and financial instruments, scheduled to be completed in June, would require a few more months of work. No specific deadline was set for the projects. Read "FASB, IASB Announce Delay on Priority Projects" for more information.
In part four of this exclusive JofA interview, FASB Chairman Leslie Seidman explains why the board’s revised approach to lease accounting will not be a return to business as usual.
JofA: At your Feb. 17 joint meeting, FASB and the IASB tentatively decided to delineate financing leases and other-than-financing leases. Does this signal a shift closer to the two types of leases—operating and capital leases—that we’re familiar with in current GAAP? Or, is this something different?
Seidman: It is something different. The primary objective of the leasing project is to reflect material lease obligations and commitments on the balance sheet to the extent of the promises that have been made in the arrangement. The decision that was made in February does not affect that at all. We would still reflect leases on the balance sheet—and I’m mostly speaking from the lessee perspective here, because the lessor does, in fact, sometimes take commitments off the balance sheet depending on the terms. But, for the lessees, they would still reflect lease commitments on the balance sheet. The board will, however, consider whether there should be an exception for short-term leases.
What we were talking about at that meeting was distinguishing between the two, primarily for the purpose of income statement recognition. The financing side of that line, which exists today, requires that the right-to-use asset be amortized, and that interest expense be recognized on the lease obligation. This proposed delineation would not change that for the financing arrangements. On the other side, what we are exploring is whether there are some lease arrangements that are not entered into primarily for financing purposes, and therefore, whether a different pattern of income statement recognition would be appropriate for those.
Now the pattern that we’re talking about is something that would generally be straight-line, which is similar to the expense pattern today for operating leases. We are exploring that approach because, overwhelmingly, investors and preparers of financial statements told us they did not think that having that “as-if-purchased” pattern of amortization and interest expense in the income statement was relevant for these particular types of arrangements.
JofA: Just to clarify, that discussion was a tentative discussion to this point. The boards have not made a final decision on these issues.
Seidman: Right. I would describe it as a tentative decision, giving the staff direction to explore that change in approach further. They will be bringing back to us a couple of topics. Number one, how would we best articulate the line between financing and other-than-financing [leases]. Then, number two is, specifically, how would you implement that delineation to achieve a different pattern in the income statement?
On leasing, I think that we are in a similar situation to the one I described for revenue recognition. We’ve made some initial decisions to make simplifications to the model relative to what we had exposed. However, at our [March 2] meeting, the staff came to us with a couple of changes that they proposed and asked for time to do outreach, to check with constituents right now about whether these changes that they’re proposing are viewed as responsive to the concerns that were raised, operational, and, again, are they perceived as improvement?
JofA: Would this be part of the field-testing?
Seidman: I use the word “field-testing” sparingly, because, to us, field-testing means a full-blown attempt to implement the standard. That’s not what I’m talking about. I’m talking about what I’ll call fieldwork, where we go out and have something short of a field-test to discuss a particular idea or proposal with constituents, when we think that a well-prepared, well-informed conversation will give us the input we need to know whether we’re on the right track.
So, at this point, that is the approach that I’m talking about—that we will meet with a variety of companies, auditors and investors to test these ideas and see if they think that it’s responsive to the concerns that have been raised. Our plan is to run that kind of outreach or fieldwork in parallel with our re-deliberations. I’ll just reinforce the point I made before, I’ve added staff to these teams to help us with that.
JofA: Is it still realistic at this point for the leasing project to be finished by the end of the second quarter?
Seidman: Our plan is to continue to work through these issues with June as our goal for completion. But the June date is just a target date to signal our commitment to try and work through these issues as efficiently as we can. But, if we need more time to conduct this thorough process that I’m describing, we will take the time we need. It is much more important to me that we end up with a standard that is perceived around the world as an improvement, and that is operational and comprehensive. In other words, ready for prime time the first time we issue it than to meet any particular deadline.
—Matthew G. Lamoreaux is a JofA senior editor. To comment on this article or to suggest an idea for another article, contact him at email@example.com or 919-402-4435.
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