Lease Accounting: FASB Revised Exposure Draft
Director, Pete Kennedy
On May 16th, the FASB issued its revised exposure draft on Lease Accounting. This is the second time an exposure draft has been released on this topic. The draft details a major re-write to the rules around accounting for leases. In a nutshell:
Lease accounting as it currently stands separates leases into two basic types; Operating Leases and Capital Leases. The majority of all leases are accounted for as Operating Leases. The accounting is simple – you expense the lease payments ratably over the lease term. In most cases the expense is recorded as the lease is paid. Capital Leases presume that a substantial portion of the ownership of an asset has transferred due to the lease terms. If the term of the lease meets certain capital lease parameters, an asset is recorded on the books and an offsetting liability for the present value of the lease payments is recorded and those are both amortized away as the lease term progresses.
The proposed change would do away with the traditional operating lease vs. capital lease concept and would treat nearly all leases as capital leases are currently treated. This includes many mundane leases (think vehicles, construction equipment, medical equipment, copiers, office space etc.).
My opinion: Not a good idea. This will create an accounting fire drill. Where previously organizations would only need to expense lease payments as they are paid, they would now need to expend a significant amount of accounting resources calculating the net present value of lease payments (using an appropriate discount rate) to capitalize the “right of use asset” and an offsetting liability and expense the lease payment with an interest component for each and every lease with terms over one year. Where there are renewal options those may need to be incorporated also. This sets up book vs. tax differences, throws off financial ratios, renders many debt covenants invalid and in general makes a mess of a previously relatively simple accounting area for most organizations.
In reading through some of the letters in response to the initial exposure draft in 2010 (there were nearly 800 of them), I was struck by the dividing line between those in favor of the changes – generally from academia or from a State Accounting Society, and those opposed – generally someone who would actually need to implement and comply with the revised standard. As an editorial comment, although the FASB goes to great lengths to solicit public input, the volume of responses is weighted in most cases disproportionately in favor of those whose interest is more academic than practical.
The feedback I’ve been getting at seminars and the like over the past few years is that the train has left the station; that this is a done deal and we should all begin preparing to comply in the next few years.
But…all is not yet lost. There appears to now be some divided thinking on the FASB Board regarding this issue. Also; a letter to the FASB Chairman signed by 57 members of the US House of Representatives discusses a study on the projected economic costs of the change. The letter urges the FASB to conduct a detailed study on the costs and benefits of the change before proceeding. I think I see Delaware’s own John Carney on there along with Rep. Peter King (R-NY) and Rep. Maxine Waters (D-IL) – safe to say that’s a pretty broad spectrum. They can’t agree on gun control, government spending, same-sex marriages or much of anything else, but they do agree that pushing this change through is a bad idea. So here’s what we can do:
The FASB does read and consider the feedback it receives. The responses are cataloged and published on the FASB’s website so some of us have to limit our vocabulary to words that are professionally acceptable. My response is already on there. The closing date is September 13, 2013. If you have time – make your voice heard and help the FASB to see the bigger picture here. I believe that there is a possibility this change can be turned back and a significant amount of administrative effort and cost saved.
If you have any questions, please contact Pete Kennedy at firstname.lastname@example.org.