Marc Betesh, President of KBA Lease Services, was a participant on the FASB/IASB’s Public Roundtable regarding the upcoming Lease Accounting changes held the afternoon of January 6, 2011. Louis J. Ferro, CPA and Senior VP of Audit Services for KBA and Christopher Werely, Chief Operating Officer of Visual Lease attended the roundtable as observers. The meeting agenda and a complete list of the roundtable participants can be found here.
Regarding Lessee accounting changes, the primary topics of discussion concerned (1) how service costs related to lease agreements (for leases of real estate, specifically operating expenses, CAM, real estate taxes and insurance costs) should be handled and (2) how the lease term and rental payments should be calculated for purposes of determining the value of the right-of-use asset and the liability for lease payments.
Regarding services costs, it was pointed out that current GAAP already requires the separation of all lease and non-lease cost components. Investors/Lessors on the roundtable appeared to favor the non-separation of service costs, while lessees favored the annual expensing of those service costs that are distinct and can be easily identified. KBA/Visual Lease believes that, consistent with current GAAP, the Boards will require the separation and expensing of certain service costs and will provide the appropriate guidance to do so.
Regarding the related topics concerning the determination of the lease term and rental payments to be capitalized and placed on the balance sheet, the discussion focused on whether option periods and contingent rents should be considered. Strong arguments against considering these factors were made by several participates as, at the time of the initial measurement of the right-of-use asset and liability for lease payments, lease options and contingent rents are not legal liabilities. Marc Betesh stated that if such options/contingent rents were required to be included, at best, the calculations would be based on a significant amount of subjectivity and, at worst, possibly subject to manipulation. Marc also stated that if they are required to be included, as the current Exposure Drafts contemplates, transactions with similar economics (e.g., exercising an option to lease additional space in your building versus leasing addition space in the building next door under a new lease) would result in different amounts reported on an entity’s balance sheet and income statement. Other participants suggested that the current GAAP criteria requiring the lease term be “reasonably assured” and the contingent rental payments be based on a “best estimate” be maintained, rather than using the new proposal that these amounts be based on a probability weighting of the term/rents “more likely than not to occur”.
Regarding Lessor accounting, several participants suggested that the Boards should exclude changes to current GAAP at this time, as there has not been any great outcry from financial statements users concerning how lessors currently measure and report their lease transactions. In addition, other participants requested that the Boards provide further guidance concerning the accounting for leveraged leases.
Finally, although the Boards received over 700 comment letters regarding the current proposed accounting changes, a discussion ensued questioning why the bigger players in the real estate industry were not more actively involved in the Exposure Draft process. It was stated that most of the industry assumes the proposed changes are a “Done Deal.” FASB board member Larry Smith emphatically stated that the changes are “Not a Done Deal” and assured all in attendance that all suggestions and opinions will be thoughtfully considered as the Boards finalize any changes to the current accounting for leases. In fact, as the roundtable concluded, the Boards stated that due to the extensive issues that needed to be contemplated, they may need to extend the project’s completion date beyond the current target of June, 2011
If you would like to further discuss KBA’s/Visual Lease’s views regarding the roundtable meeting, please contact Louis Ferro, CPA, SVP at lferro@kbalease.com, 888.750.4500 x405.
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