AICPA: Lease Proposal Fails to Address Application Issues

The AICPA’s Financial Reporting Executive Committee (FinREC) commented on FASB’s Proposed Accounting Standards Update, Leases . The exposure draft was developed jointly with the International Accounting Standards Board (IASB).


FinREC said it supports the boards’ overall objective to develop a single approach to lease accounting and to require assets and liabilities arising under leases to be recognized in lessees’ statements of financial position. However, FinREC believes there are fundamental application issues not addressed by the exposure draft, and revisions that need to be made to various aspects of the boards’ proposal, including those related to the right-of-use approach to lessee accounting.


The FASB proposal would result in a single “right-of-use” approach applied consistently to lease accounting for lessees and lessors. Among other changes, the approach would result in the liability for payments under all lease contracts within the scope of the standard and the right to use the underlying asset being included on the lessee’s balance sheet. The standard setters say the changes would improve the information available to investors and other financial statement users about the economics surrounding lease contracts.


Unlike FASB’s discussion paper, Leases: Preliminary Views , published in March 2009, which focused primarily on lessee accounting, the exposure draft, Leases, would result in changes on both sides of a lease transaction. A lessor would apply either a performance obligation approach or a derecognition approach. “The majority of FinREC members do not support the boards’ hybrid (lease classification) approach to lessor accounting—instead they support the derecognition approach as the single lessor accounting model,” FinREC said in its comment letter.


The proposal includes simplified accounting for short-term leases—leases having a maximum term of 12 months or less. The simplified accounting would allow lessees to ignore the effects of interest on the recorded assets and liabilities and allow the lessee to record the liability for lease payments at the undiscounted amount for lease payments. The simplified accounting would allow the lessor not to recognize assets or liabilities arising from a short-term lease, nor derecognize any portion of the underlying asset.


Under current U.S. GAAP and IFRS requirements, financial reporting for lease contracts depends on the classification of a lease. When a contract is classified as an operating lease, the lessee does not record any lease-related assets or liabilities on its balance sheet. The current approaches can also allow two similar leases to be accounted for in very different ways if they fall just over the line into operating or capital leases, FASB Chairman Leslie Seidman said in an interview when the proposal was released.


Companies using capital lease accounting “will potentially be changing the amount because, if you have a lease that has renewal options, termination options, contingent rentals and other variable lease terms, what we’re asking people to do is estimate the effect of those provisions on how long they think the lease is going to remain outstanding, but there we’re saying what’s the maximum lease term that you think is more likely than not” to occur, Seidman said.


In its comment letter, FinREC said, “ We do not support the boards’ approach to accounting for lease renewal options and contingent rents. We believe that the lease term should be defined as the lessee’s (lessor’s) best estimate of the lease term. We believe contingent rents and expected payments under residual value guarantees should be included in the measurement of assets and liabilities based on management’s best estimate of payments to be made (received) under the lease.”


On the lessee side, industries such as retail, airlines, trucking, railroads, businesses with fleets of vehicles and banking are likely to be among the most affected by the proposed accounting changes, Seidman said. Lessor industries such as real estate, equipment manufacturers, information technology, medical equipment and banks are also affected by the proposal. But Seidman said last year that she doesn’t think the proposed changes would dampen leasing activity. “ It’s hard for me to understand how just a change in accounting would cause people to change their view about the benefits of leasing,” she said.


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