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Businesses See Hope that Leveraged Lease Accounting Could Survive

May 21, 2014

As the chances for a converged standard on lease accounting fade, some U.S. businesses are optimistic that an accounting practice for financing big-ticket assets could survive.Businesses that use leveraged leases to finance their use of fixed assets plan to press the FASB to let them continue the practice allowed under current U.S. GAAP but eliminated from the FASB and IASB’s 2013 lease accounting proposal.

Citing the importance of having the same rules on both sides of the Atlantic, the FASB in its 2013 proposal to overhaul lease accounting eliminated specialized treatment for deals businesses use to buy the rights to big-ticket items like jets, rail cars, and power plants.

Leveraged leases, as the transactions are known, would have no place in U.S. GAAP, and U.S. accounting rules would be aligned with IFRS.

The proposal was issued when the FASB and IASB wanted to write a converged, global accounting standard for all lease contracts.But recent negotiations on the high-profile project revealed deep splits between the boards, and the odds of convergence are fading. (See Chances for a Converged Lease Accounting Standard Grow Dim in the May 12, 2014, edition ofAccounting & Compliance Alert.)

Amid this tension, U.S. businesses that use leveraged leases believe the accounting method could be retained.

“I strongly hope the FASB will use this opportunity to really take a hard look at the merits of leveraged lease accounting and determine whether there continues to be a place for it in U.S. GAAP,” said John Bober, managing director, global technical controller at General Electric Co. “To the extent the project has become less converged, there’s more of a hope that outcome is possible.”

Bober and other adherents of leveraged lease accounting see a glimmer of hope in recent FASB meeting agenda papers, which list future topics for the board to discuss.On the list: leveraged lease accounting.The topic’s inclusion doesn’t guarantee the FASB’s level of commitment, but it at least signals that the standard-setter is open to discussion, Bober and others said.

“We’re going to lobby for it to be kept in place,” said Bill Bosco, a principal at Leasing 101, a business consulting firm, and a member of the FASB and IASB’s lease accounting working group. “It’s certainly not a dead issue.”

Leveraged leases are financing arrangements to buy large assets worth $100 million or more, and they typically involve three parties.A company that needs a big asset will lease it from a middleman that puts up some of the money to buy the asset and rent it back to the customer.A bank or other commercial lender finances the rest of the deal.

The middleman in the transaction—the lessor—can depreciate the full equipment cost for tax purposes despite having spent only a fraction of the purchase price.The lessor can pass along the savings to the customer through a lower interest rate.

Banks, seeking long-term returns on high-dollar purchases, also benefit from the transactions, said Michael Gullette, vice president of accounting and financial management at the American Bankers Association (ABA).

“It’s a business that would shut down without the accounting treatment because there’s too much capital required,” Gullette said. “It would make it a lot less profitable.”

Lessors use leveraged leases primarily to cut their tax bills.SFAS No. 13,Accounting for Leases,(FASB ASC 840), is the provision in U.S. GAAP that allows lessors to present rent payments net of the portion that is applicable to principal and interest on the loan by recognizing income on an after-tax basis.Because net revenue is presented within operating income, the lessor’s risks and returns are accurately reported, the ABA said in a comment letter to the FASB on the 2013 proposal.

The FASB’s Proposed Accounting Standards Update (ASU) No. 2013-270,Leases (Topic 842),got rid of the special treatment for leveraged leases and in doing so, overstated lessor leverage, the ABA said.The removal of the leveraged lease provision was made so that the FASB proposal would match the IASB’s Exposure Draft (ED) No. 2013-6,Leases.

The boards sought to use their proposed changes to lease accounting to force businesses to record their exposures and costs from fixed assets that were leased.But business groups argue that the boards’ rationale for the proposed changes break down when it comes to leveraged leases.

When asked recently byAccounting & Compliance Alertabout the FASB’s level of commitment to leveraged lease accounting, FASB Chairman Russell Golden said it was an issue that the board planned to discuss, but he did not signal the direction the standard-setter would take.

If a full reinstatement of leveraged lease accounting is not possible, some businesses hope the FASB could be open to allowing accounting for existing leveraged leases to be maintained, Bober said.

“There are a few people who hold out some hope that even if leveraged leasing is not retained in a new standard, perhaps there’s room for grandfathering,” he said.

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