written by Joe Page

Joe Page head shot

The Financial Accounting Standards Board (FASB) has been reviewing the accounting for leases for several years in an effort to provide for more relevant accounting and disclosure of entity’s leasing activities. The review is also part of the convergence of U.S. accounting standards with international accounting standards as determined by the International Accounting Standards Board (IASB). While details of the changes have yet to be finalized, the FASB is in the final stretch of its review and it is clear that substantial changes are on the way.

The FASB issued an exposure draft of the new standards in 2010. While the board failed to finalize the standards due to certain comments it received, the exposure draft provides significant insight into what the final standards will look like. In short, the new standards will virtually eliminate what is now referred to as an operating lease which currently allows the lessee to expense its lease payments as made and not record a related asset or corresponding liability. By eliminating operating lease accounting, lessees will be required to record an asset representing the right to use the leased asset and a corresponding liability for the obligation to make the related lease payments.

The concepts included in the proposed new standards are relatively straight forward. It is the computation of the initial asset and liability and the corresponding amortization of each that has proved difficult for the FASB to finalize. The FASB is currently working on a second exposure draft to address concerns relating to these issues brought to light based on comments from its 2010 exposure draft. The FASB intends to issue the second exposure draft in the fourth quarter of 2012.

While it is unlikely that the standards will change before the end of 2013, it is evident that the standards are going to change relatively soon and the impact of the change will be significant. Balance sheets are going to change and new systems will be required to compute initial recording of leases and account for future payments lease obligations and amortization of related assets.

Organizations engaged in leasing activities should begin to familiarize themselves with the proposed standards and begin to plan accordingly. It is believed the standards will require retroactive application of the new standard when finalized and implemented. The new standards will be much easier to implement if the planning begins now. The planning should include not only the recording of existing and new leases but also the affect the change in accounting could have existing loan agreements that may limit the incurrence of additional liabilities or include financial covenants that will be affected by the new standards.

The current status of the FASB project and a copy of the 2010 exposure draft can be found at: http://www.fasb.org/jsp/FASB/FASBContent_C/ProjectUpdatePage&cid=900000011123

Joe is Managing Partner and in charge of audit services for clients in fields such as nonprofit, colleges and universities, manufacturing and distribution, electric utilities and construction.