News highlights for December 2013

The converged FASB/International Accounting Standards Board (IASB) proposal on financial reporting for leases faces significant opposition from businesses around the globe. An analysis of comment letters on the proposed standard submitted by business and industry respondents that would be considered financial statement preparers (excluding accounting firms) revealed substantial opposition to the proposal.

Of the 268 letters analyzed, 212 expressed a decidedly negative opinion of the proposal, which would place leases on the balance sheet and create a dual-recognition model for lessees. Just 25 letters indicated substantial support for the proposal, and 31 letters did not express a clear positive or negative overall opinion of the proposal. Additional letters continued to be posted to FASB’s site following the analysis.

The objections from businesses came from various industries and nations:

• China Telecom said the standard is difficult to understand, apply, and implement, and that the differences between lessor and lessee accounting are logically unsound.
• Wesfarmers Limited, one of Australia’s largest listed companies with operations in retail, mining, insurance, chemicals, and energy, said IAS 17 should be retained for leases because on-balance-sheet recognition of leases (including property) is conceptually inconsistent with the accounting treatment of economically similar arrangements.
• Delta Air Lines noted that former IASB Chairman Sir David Tweedie once said that one of his ambitions is to fly in an aircraft that is on an airline’s balance sheet. But Delta concluded that although the ED is consistent with Tweedie’s objective, the benefits of this particular proposal do not outweigh the costs.

The proposal, available at tinyurl.com/nm6ghaq, would classify “Type A” leases as those during which a more than insignificant portion of the value of the leased item is consumed. These would include most vehicle and equipment leases. Type A lessees would recognize a lease as a nonfinancial asset measured at cost, less amortization. This would result in a total lease expense that generally would decrease over the lease term.

During Type B leases, a more than insignificant portion of the value of the leased item is not consumed. In Type B leases, which would include most real estate leases, lessees would report a straight-line lease expense.

The AICPA Financial Reporting Executive Committee (FinREC) suggested that the boards should not use the “more than insignificant” concept to differentiate between Type A and Type B leases. FinREC, which is authorized to make public statements on behalf of the AICPA on financial reporting matters, supported the proposal’s objectives and its dual-model approach for lessee and lessor accounting. But FinREC recommended that leases consistent with in-substance finance purchases be accounted for as Type A leases, and that other leases be accounted for as Type B.

FASB’s own Investor Advisory Committee (IAC) also opposes the proposal.

The boards have expressed a desire to have a final standard in place by 2014, although implementation is not expected to occur earlier than fiscal years beginning Jan. 1, 2017.