News highlights for November 2013

The converged proposal on financial reporting for leases faced resistance as the comment period closed Sept. 13.

FASB’s Investor Advisory Committee (IAC) declined to support the proposal, stating that the proposal is not an improvement to current accounting. And the Equipment Leasing and Finance Association (ELFA), a U.S. trade group, continued its campaign against the proposal with a news release drawing attention to the advisory committee’s dissent.

“This raises another key question,” ELFA President and CEO William Sutton said in a news release seizing upon the IAC’s conclusion. “Is the cost/benefit analysis in the exposure draft sound if key users and other stakeholders maintain that current GAAP gives them better information than the proposed exposure draft and that the proposed rules are too complex?”

The proposal by FASB and the International Accounting Standards Board (IASB), available at tinyurl.com/ldedjoo, calls for lessees to report a straight-line lease expense in their income statement for most real estate leases. In most equipment and vehicle leases, lessees would recognize leases 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.

Former FASB Chairman Leslie Seidman said when the proposal was released that it reflects investors’ views that leases are liabilities that belong on the balance sheet. IASB Chairman Hans Hoogervorst said in a speech in September in Berlin that bringing leases onto the balance sheet will have benefits for preparers in addition to providing information that currently is obscured from investors.

“For many companies, such as airline and railway companies, the off-balance-sheet financing numbers can be quite substantial,” Hoogervorst said. “It has been estimated that the hidden leverage in leases leads to an underestimation of long-term debt by some 20%. So we are not talking about small fry.”

During the IAC’s meeting with FASB on Aug. 27, IAC member David Trainer, CEO of investor research company New Constructs, said it’s helpful to get more transparency on the liabilities related to leases. But he said the complexities of leasing activity make it almost impossible to create a one-size-fits-all solution that can be put on the balance sheet.

The IAC recommended that the boards increase disclosure requirements about leases rather than placing them on the balance sheet.

“Having to unwind an accounting construct put on the balance sheet and then having to do my own analysis is not very desirable,” Trainer said. “I’d rather just have the data there and let me do with it what I think I ought to do with it.”

The boards hope to have a converged standard in place by 2014, with implementation expected to start not earlier than fiscal years beginning on or after Jan. 1, 2017.