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Final Leases Standard May Be Delayed to 2015

April 22, 2014

The FASB and IASB’s most recent discussion on their landmark project to overhaul the accounting for lease contracts exposed sharp differences on fundamental pieces of the planned amendments. The significance of the disagreements and the volume of the remaining work suggest that the chances for publication of a final standard in 2014 are fading.

As the FASB and IASB move ahead with the lease accounting project, the boards appear to be more likely to release the final standard in 2015, not 2014.

“The staff indicated that perhaps next year is more realistic,” FASB staff assistant director Jeffrey Mechanick told members of the Healthcare Financial Management Association on April 17, 2014, at a meeting with the accounting board at its Norwalk, Connecticut, headquarters.

The revised timeline may not surprise financial professionals who have followed the controversial project.

The FASB and IASB released largely converged proposals in May 2013 via the FASB’s Proposed Accounting Standards Update (ASU) No. 2013-270, Leases (Topic 842), and the IASB’s Exposure Draft (ED) No. 2013-5, Leases.

The proposals are a response to a decades-old complaint that companies mask substantial liabilities by not revealing the costs of rented real estate, equipment, and vehicles on their balance sheets. If the proposed changes become final, companies will have to recognize almost all lease expenses as liabilities, a sea change for U.S. GAAP and IFRS. The boards remain committed to this goal, but their differences on how the expenses should be recorded on income statements became clear when they met in March.

The majority of IASB members said most lease expenses should be treated as financing transactions, with interest and amortization calculated with the rental expense. Because interest is calculated on a declining balance over time, the cost to rent a piece of equipment would look more expensive at the beginning of a lease. Many companies around the world say such accounting treatment will make them look more leveraged than they are and diminish their market value and creditworthiness.

A 6-1 majority of the FASB said some leases should be treated like financing transactions, but some should be treated like simple rental agreements, with even payments over a contract’s life.

The income statement pattern is central to the project. If the boards can’t agree on the method for recognizing a contract’s periodic costs, there’s little chance they’ll produce converged final standards.

Neither the FASB nor the IASB’s project timelines indicate that the project will wrap up in 2014, but leaders from both boards said they hoped a final standard would be published by the end of this year.

“Let’s hope it’s early next year,” FASB member Lawrence Smith told the healthcare executives.

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