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Golden Says Study of Leasing Issues May Keep Convergence Effort Alive

March 20, 2014

A key decision about accounting for lessees has been put off until April or May, pending the FASB’s research on the issue. FASB Chairman Russell Golden said the study was needed if the FASB and IASB are to fulfill their attempt to write a converged standard.

The lease accounting project had almost reached the point of no return—most signs suggested that the FASB and IASB were about to concede that they were so far apart on the project’s central premise that they would have to go their separate ways.

But in an unexpected move on March 19, 2014, FASB Chairman Russell Golden said the U.S. board’s research staff would study some of the main issues that had cleaved the FASB and IASB in two camps and that the two boards would revisit the issues in a month or two.

“We’re still committed to make an improvement and committed to trying to minimize our differences,” Golden told Accounting & Compliance Alert after the meeting.

Golden’s announcement, made at the end of an abbreviated second day of joint meetings at FASB headquarters in Norwalk, Connecticut, can be seen as either a last-ditch attempt that rescues a converged lease accounting standard or a move that delays an inevitable split between the U.S. and international accounting boards on the controversial project.

“I was thinking this was the season finale, like fur was going to fly,” said Bill Bosco, principal of Leasing 101 and a member of the FASB and IASB’s leases working group. “They seem to be much more optimistic than I would have thought.”

“This was sort of an abrupt end. They realized they weren’t going to get anywhere today,” said Ralph Petta, chief operating office of the Equipment Leasing and Finance Association, a trade group that represent lessors.

Bosco and Petta both attended the previous day’s meeting, when FASB and IASB members’ opinions on the leases project were so far apart that it looked impossible that they would come to an agreement. (See Impasse on Key Issues Puts Lease Accounting Convergence at Risk in the March 19, 2014, edition ofAccounting & Compliance Alert.)

Hurdles to overcome

The FASB and IASB’s project to overhaul accounting for leases aims to end the long-standing practice of keeping the costs of almost all leases off company balance sheets. Under the proposals, companies would have to recognize things like rented office space and trucks as assets and the contractual payments for them as liabilities, which addresses years of criticism that current lease accounting masks companies’ true expenses.

The boards agree that almost all leases should be recorded on company balance sheets—a major shift from current accounting practice—but they cannot agree on the mechanics.

A strong majority of IASB members on March 18 had said they believed all leases should be considered financing transactions and receive the same treatment on company income statements. All seven FASB members had taken the opposite view, saying there were fundamental differences between leases that act as rent-to-own contracts and leases that just convey the right to use a piece of equipment or a building, and they merited different income statement outcomes.

The boards also differed on accounting for lessors, with both boards abandoning the models in their May 2013 proposals, released 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 IASB, however, wanted to maintain the lessor accounting guidance in IAS 17, Leases, while all seven FASB members wanted some lessor agreements to follow the guidance in the forthcoming revenue recognition standard.

Even though the wording is different, Golden said after the meeting that the two different approaches will not result in significant differences in practice.

The boards on March 18 also disagreed on whether to exempt companies from accounting for small-ticket, nonessential leased assets. A majority of the IASB said offering this break was the only way to get businesses to accept the controversial proposal. All seven FASB members, on the other hand, said it could result in large numbers of low-dollar leases for things like computers, telephones, and coffee machines adding up to a significant number for a company’s bottom line.

“If the overall objective was to put material liabilities on the balance sheet, and you all that are supporting it acknowledge this could amount to a material amount, I question whether we’re really accomplishing the objective of the standard,” FASB member Lawrence Smith said on March 18.

FASB Vice Chairman James Kroeker said the standard-setters would set a dangerous precedent by acquiescing to carving out small-ticket transactions from controversial standards.

“This would be the first of literally requests in standard after standard to scope out material, small-dollar, high-volume [transactions], and so I can’t support it,” Kroeker said.

But a majority of IASB members said they had to listen to companies on at the issue because they had ignored their requests for simplifications and adjustments on other areas of the project.

“There are a lot of people who are really trying to stop this. What we are talking about now is a way for us tell these people your main argument is cost and complexity, we are telling them, ‘OK, we do this to show you we have listened’,” IASB member Jan Engstrom said. “We are not proud of it.”

Consensus on some issues

Although the March 18 discussions revealed deep divides between the FASB and IASB, the boards found more common ground—albeit on smaller issues—the following day.

The FASB and IASB agreed on decisions related to the definition of a lease term, which is a central part of the project.

The 2013 proposals defined a lease term as the noncancellable period for which the lessee has the right to use an asset. The lessee must also consider the periods covered by an option to extend the lease if there is significant economic incentive to do so and periods covered by an option to terminate the contract if there also is significant economic incentive.

The boards agreed that the threshold for determining the lease term should be a high threshold that is based on whether the lessee is economically compelled to exercise or not exercise an option.

The boards agreed that there should be a high threshold to evaluate the economic incentives and the business must be “reasonably certain” that it would take advantage of the options to extend or shorten the lease term.

A business would have to reassess the terms of a lease when something significant happens, the boards decided. Such events could be when a lessee improves or increases the value of the leased asset, such as renovating a rented office space.

The boards also agreed that purchase options would be accounted for in the same way as options to extend or terminate the lease.

Finally, the boards agreed to maintain a provision in the 2013 proposals that would not require leases of 12 months or less to be accounted for under the proposed new accounting regime. The boards also agreed to change the definition of “short-term lease” so it is assessed consistently with the definition of “lease term.” This would allow daily rentals or month-to-month leases that may not meet the definition of a short-term lease to take advantage of the break.

The boards also agreed to require disclosure of the amount of expense relating to short-term leases.

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