Finalizing the changes is taking much longer than anticipated. This means the effective date of the changes will be pushed off farther into the future, giving companies more time to deal with the impact. As you have probably heard, extensive public comment over the proposed changes in the Boards’ original August 2010 Exposure Draft have prompted them to re-expose a revised proposal sometime during the second half of this year, followed by another public comment period and perhaps further revisions. This extended period of deliberation clearly signals that the Boards are carefully considering industry criticisms and suggestions and will take all the time necessary to properly account for the economic realities inherent in the various types of leasing transactions.
At their last meeting in late February 2012, the Boards discussed lessee accounting and, in particular, different methods of amortizing the right-of-use asset. They also discussed any consequences that a change to the lessee accounting model would have on the tentative decisions for lessor accounting. The Boards were not asked to make any decisions. The Boards directed the staff to undertake further outreach and research on the alternative lessee amortization approaches before they reach a tentative decision on which approach to propose in the re-exposure draft.
Without getting into the accounting “weeds” it appears that the FASB and the IASB are at odds regarding which amortization approach to propose. The amortization approach determines the P&L pattern a company must recognize for each lease transaction. The FASB favors a newly introduced “interest-based” approach which would generally result in straight-line P&L and only be applied to the former operating leases (the former capital leases would continue to be amortized per current GAAP). In contrast, the IASB favors an “underlying-asset” approach which would result in a P&L pattern consistent with the asset’s depreciation method, had the lessee owned the asset and would apply to both the former operating and capital leases.
When the Boards voted we were left with a clean split- the FASB fully supporting the “interest based” method and the IASB in favor of the “underlying asset” approach. Lessees have already commented that they think both new methods are overly complex and potentially unworkable. Interestingly, no voter agreed that they would switch their vote to the other method if their own approach proved unmanageable. Stalemate anyone?
The Boards have planned one more meeting to see if they can work out a compromise regarding this very significant P&L pattern issue. If not, the FASB and IASB could issue two different re-exposure documents, both subject to public comment.
So we still have a long way to go before the final changes to the lease accounting standards are enacted, and an even longer way before the new standards must be implemented. The current consensus is that the first set of financial statements which would be required to reflect the new standards would be no earlier than for the year ended 2015 or 2016. However, as these statements would necessarily include a comparison to the prior two years, the changes would also need to be reflected in the 2013 or 2014 results at that time as well. So take a breath, enjoy the summer and BE HAPPY. When the time is right, KBA and Visual Lease will be ready to assist your companies with the transition to whatever new standards come our way.
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