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Lease Standard May Require Clarification

The FASB in February published its long-awaited overhaul to lease accounting. Since then the board has been questioned about the amended accounting for subleases, and board members are considering whether they need to revise the standard to provide a clear answer.

The FASB may decide by late 2016 or early 2017 to clarify a limited part of the lease accounting standard it published in February.

The board has received questions about the treatment of the term of a lease, specifically for subleases, in Accounting Standards Update (ASU) No. 2016-02 ,Leases ( Topic 842 ), FASB Chairman Russell Golden said on September 19, 2016.

“The standard talks about how to evaluate the lease term when you have optional renewals,” Golden told reporters after a meeting with the Financial Accounting Standards Advisory Council (FASAC). “The question is when you have a head lease and then you sublease, should the lease terms match or should they be different? And there’s diversity in practice.”

The FASB is gathering research about the need for the clarification, Golden said. It also is open to other implementation questions on the standard.

FASB member Marc Siegel has been assigned by the full board as the point person for questions from the public. Unlike other major accounting standards that recently have been issued, the FASB does not plan to convene a special Transition Resource Group to address questions about the standard.

“I think it’s important the board stand ready to help our stakeholders in their implementation efforts,” Golden said.

The standard goes into effect in 2019 for public companies. It is expected to make company balance sheets swell as it forces businesses to record as assets the heavy equipment, vehicles, and real estate they rent. Payments owed under a lease contract will be recognized as liabilities.

The standard is the result of years of debate on what has long been a thorny issue in accounting.

Under existing lease accounting rules, companies only have to record lease obligations on their balance sheets when the arrangements are akin to financing transactions, such as rent-to-own contracts for buildings or vehicles. But few actually get recorded because of what critics call “bright lines” in the standards that allow most deals to be recorded as simple rentals. If an obligation is not recorded on a balance sheet, it makes a business look like it is less leveraged than it really is.

Investors and analysts, however, have long considered lease expenses as an essential component to assessing a business’s financial health. Many investors use the data in footnote disclosures to determine what a company’s balance sheet would look like if the company were forced to own up to its lease liabilities.

The IASB on January 13 published IFRS 16, Leases . The FASB and IASB’s standards differ on many levels, but they both require lease obligations to be recorded on company balance sheets.

For in-depth analysis of the FASB’s standard for lease accounting, please see Catalyst: U.S. GAAP — Leases, also on Checkpoint.

Additional analysis of the guidance in the lease standard can be found in Accounting and Auditing Update Service, [AAUS No. 2016-15], and the SEC Accounting and Reporting Update Service, [SARU No. 2016-13], (March 2016): Special Report: Accounting for Leases—An Explanation and Analysis of Accounting Standards Update No. 2016-02.

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