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Minor Changes to Leases Standard to be Proposed in Early 2019

Thomson Reuters Tax & Accounting  

Thomson Reuters Tax & Accounting  

The FASB by early 2019 plans to release for public comment two minor changes to its lease accounting standard dealing with questions from lessors. The plan will attempt to address queries about assessing the fair value of certain assets and also how to present leased assets in the statement of cash flows.

The FASB by early 2019 will release for public comment two narrow changes to the board’s sweeping new lease accounting standard, focusing on late-stage questions about lessors.

The proposal will attempt to answer a question banks and holding companies had about assessing the fair value of assets they rent out and another question about how to present sales-type and direct financing leases in a company’s statement of cash flows, the FASB unanimously agreed on December 4, 2018.

The proposal will be released for a 15-day comment period or no later than January 15, the board agreed.

The short public comment period reflects the narrow nature of the questions businesses had about Accounting Standards Update (ASU) No. 2016-02, Leases, (FASB ASC 842), which the FASB published in 2016. Public companies must follow the new standard in 2019.

The new accounting standard replaces FASB ASC 840, Leases, which provided lessors who are not manufacturers or dealers a so-called “fair value exception” for determining the fair value of leased assets. Specifically, paragraph 840-10-55-44 stated that if a lessor is not a manufacturer or dealer, the fair value of the property at lease inception ordinarily will be its cost, reflecting any volume or trade discounts that may apply, among other provisions.

This break did not make it into the new lease accounting standard. Instead, ASC 842 directs businesses to use the definition of fair value established in ASC 820, Fair Value Measurement. The standard describes fair value as “the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants and the measurement date.”

Lessors that have used the fair value exception in ASC 840 for more than 40 years told the board that applying ASC 820 to measure fair value could result in a day-one loss and distort their financial statements.

“The staff did not think it was the board’s intent to change accounting for qualifying lessors and [the FASB] did not intend to remove the fair value exception for qualifying lessors,” FASB post-graduate technical assistant Cole Moffatt said.

The FASB unanimously agreed.

“It is perfectly appropriate in Topic 840 to have that exception because in this case, the asset we’re talking about is an in-use asset, so the cost basis as measurement provides more relevant information,” FASB member Christine Botosan said. “It’s going to provide more information about future cash flows and help users predict those future cash flows.”

On the second issue, the FASB also had unanimous agreement. Banks asked the board about 842-30-45-5, which requires lessors to classify cash receipts from leases within “operating activities.” But at the same time, a piece of guidance within ASC 942, Financial Services — Depository and Lending, provides an example of a direct cash flow statement in which “principal payments received under leases” are classified within “investing activities.” Banks said they believed this was conflicting guidance and asked for help. The FASB agreed that these lease payments could be classified as investing activities.

FASB Vice Chairman James Kroeker said this question came up at an industry meeting and was a good example of the standard-setter attempting to act quickly to resolve a question in practice.

“As you see conflicts or challenges, please bring them to our attention,” Kroeker said.

The FASB’s lease accounting standard is expected to result in major changes in practice for almost all businesses. It will require companies to report on their balance sheets the assets and liabilities associated with renting assets such as real estate, heavy equipment, and vehicles. Because leasing is such a pervasive business practice, it is expected to make company balance sheets balloon.

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

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