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U.S. GAAP and IFRS Go Separate Ways on Variable Lease Payments

The FASB decided to stick with a decision it made in April to require companies with lease payments that depend on an index or benchmark to avoid remeasuring their liabilities when the rate or index changes. The decision confirmed a difference with the IASB, which plans to require companies to make the remeasurements.

The FASB on February 25, 2015, confirmed one of its differences with the IASB on the boards’ long-running and contentious lease accounting project.

With a 4-3 vote, the U.S. board decided to keep a decision it made in April, which required companies with leases tied to an index or benchmark to remeasure expenses only when they have to adjust the liability for other reasons, such as changes in the length of the lease’s term. The IASB, in contrast, had decided that the liability should be remeasured when the price change takes place.

So-called “variable lease payments” are common in real estate, where lease terms may require a rent increase adjusted to changes in the inflation rate or the consumer price index. Multinational companies that report under U.S. GAAP and IFRS told the FASB that it would be easier if the FASB chose the same path as the IASB and allowed them to use consistent accounting under both regimes. U.S. companies, however, said real estate lease prices change so frequently that they would incur significant costs calculating changes and their investors would see little benefit.

A narrow majority of the board agreed with the U.S. companies.

The decision was part of the FASB’s effort to finalize a proposal it released in 2013 with the IASB to overhaul accounting for leases. The FASB issued Proposed Accounting Standards Update (ASU) No. 2013-270, Leases (Topic 842), and the IASB published Exposure Draft (ED) No. 2013-5, Leases, to address decades-old complaints that current lease accounting allows too many companies to leave significant liabilities off their balance sheets, making them look less indebted than they really are.

The proposals would require calculating most leases as liabilities on company balance sheets, a sea change from current accounting. Because almost every business is involved in some kind of lease arrangement, whether it’s for a fleet of trucks or a chain of retail stores, the proposals have been closely watched and highly criticized.

The FASB and IASB agree on the proposals’ main features but have been unable to bridge some differences. The boards now say they won’t publish identical final accounting standards, and their aim instead is to minimize the differences between U.S. GAAP and IFRS.

The FASB also discussed the terms by which lessees and lessors would transition to a new accounting standard once it’s finalized and the board chooses an effective date.

The board is prohibiting the use of a full retrospective transition, which requires companies to adjust past results using the new accounting so investors can better compare the results from year to year. In most cases, investors prefer that companies use the full retrospective, but board members said they included so many shortcuts for making the transition that they aren’t certain that the full retrospective approach will give investors financial information that can be easily compared.

Board members didn’t discuss employing the usual alternative to retrospective transition application, which is called a prospective transition and permits the adoption of a new accounting standard without adjusting prior results.

Instead board members said they’ll allow companies to use what they called a “modified retrospective” application, but they haven’t decided what the method will consist of.

“With all the variations you could get, in this case, for simplification I would almost rather say lets just require modified retrospective and not allow full,” FASB member Daryl Buck said.

The FASB also voted to retain Proposed ASU No. 2013-270’s elimination of the accounting guidance on build-to-suit lease arrangements, which are customized deals between tenants and landlords over the design of a building or rental space.

The board next plans to discuss private company issues related to lease accounting. It has said it will publish a final standard by the end of the year.

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