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Lease Standard’s 2019 Effective Date Remains Intact

The FASB remains committed to leaving the 2019 effective date for its lease standard in place despite the lobbying by the oil-and-gas industry for a two-year delay and the slow pace of the implementation process among many large companies. The lease standard is meant to address a long-standing flaw in U.S. GAAP that has permitted businesses and other organizations to leave a large part of their liabilities off their balance sheets by structuring them as leases instead of purchases funded through borrowed money.

Despite questions from some businesses about the difficulty they are having implementing the FASB’s lease accounting standard, the 2019 effective date for public companies increasingly looks like it will remain unchanged.

A FASB spokesperson on August 29, 2017, confirmed that the board was not considering a recent request to add extra time for companies to follow the new accounting.

“At this time, we are not planning to delay the effective date,” the spokesperson said.

On July 11, the American Petroleum Institute asked the FASB to consider giving companies an extra two years to comply with the February 2016 Accounting Standards Update (ASU) No. 2016-02, Leases (Topic 842). Calling the new rules a “dramatic” change that will involve more complex and time-consuming analysis than businesses anticipated, the trade group said a 2021 effective date was more realistic than 2019.

API said the problem with implementing the new accounting was not necessarily with the high-dollar lease contracts but the numerous small-dollar rental arrangements that need to be evaluated.

“Member companies currently estimate that the number of assets falling in scope of the ASU range from 1,000 to 30,000, excluding easements and right-of-way agreements which can number up to 100,000 for an individual company,” API wrote. In addition, software to help companies enter the data is not available yet.

In a July 31 report, Deloitte & Touche LLP said 47.1 percent of large companies surveyed said they were concerned about following the amended standard by 2019, in part because of the challenges of gathering the necessary data.

Oil-and-gas and utility companies have other concerns about the standard, such as the need to assess specialized property contracts called easements to determine whether they contain leases. Easements let the customers use all or part of a piece of land and are a common means for oil-and-gas pipeline owners and electric utilities to connect pipelines and power lines. As noted by Example 10 in FASB ASC 350-30-55-29, Intangibles — Goodwill and Other — General Intangibles Other Than Goodwill — Implementation Guidance and Illustrations — Easements, through FASB ASC 350-30-55-32, a pipeline operator may have more than 100 easements for a single pipeline.

To address some of these concerns, the FASB on August 2 unanimously agreed to float a proposal that would exempt companies with land easements from having to review their existing contracts to determine if they qualify as leases and subject to the new lease accounting rules.

API said the FASB’s forthcoming proposal will be a relief to the industry, but the trade group is still concerned about meeting the schedule for complying with the overall lease standard.

“We appreciate the FASB’s willingness to hear industry on the issue of easements and their engagement with us to find a reasonable solution to easements,” API said in a statement. “We are still concerned about the implementation deadline because the IT solutions for standardized reporting are not available or in place yet.”

The FASB published the leases standard after years of debate about whether and how companies should report the liabilities associated with renting stores, vehicles, airplanes, heavy equipment, and other leased assets on their balance sheets. Critics have long said an airline renting a fleet of jets, for example, has just as many financial obligations as one that takes out loans to buy them. Securities analysts often say that the lease payments add up to significant liabilities that are masked because they are not recorded on balance sheets. The amended standard is meant to correct that problem.

Under existing lease accounting requirements, 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. Few get recorded, however, because of so-called “bright lines” in GAAP that allow the deals to look like simple rentals. An obligation that is not recorded on a balance sheet makes a business look like it is less leveraged than it really is.

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

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