GAAP Rules for Leases

The FASB and IASB are gearing up for a major re-write of the GAAP rules for leases.  As the exposure draft is currently written, ALL leases would essentially be accounted for as capital leases as they are currently thought of.  The concept of an operating lease (where the expense is recorded based on the payments due under the lease) was much too simple and understandable; ALL entities would be required to compute a net present value of lease payments based on the current borrowing rates and reflect a “Right of use asset” on their balance sheet with an offsetting lease payable liability.

The comments received for the exposure draft appear to be split between individuals and organizations more concerned with policy formation issues who are in favor and those who will actually have to implement the changes that are against.  The comment period closes 12/15/2010.

The FASB is aiming at the small number of massively complex leasing structures and entities which are specifically designed to fall on one side of the “bright-line” that exists between operating and capital lease treatment under current GAAP.  Unfortunately, they are attempting to swat a mosquito with a sledge hammer.   The change applies to ALL entities and would require a significant amount of effort to implement with very little added benefit in terms of clear, useful and understandable financial information.

If you have any questions or would like more information, please contact:

Pete Kennedy

Posted in