Future for Lease Accounting Still UncertainPosted on November 9 2011 by hhadmin
For several years the FASB (Financial Accounting Standards Board) and the IASB (International Accounting Standards Board) have been working on converging their standards. One of their more prominent projects has been lease accounting.
Since FAS 13 was issued in 1976, the standards defined two methods for accounting for leases. Dependent on meeting certain defined criteria, the leases were accounted for as either operating leases or capital leases. Although there have been revisions to the standard as new financing products were developed, the criteria for determining whether you had an operating or capital lease, for the most part, have not changed. If you met one of more of certain criteria you had a capital lease; if you didn’t you had an operating lease. If you had a capital lease, you recorded an asset and a liability. If you had an operating lease, you generally recorded nothing on your balance sheet and just expensed the payments as they were made.
There were four criteria that determined if you had a capital lease. All of the four attempted to measure if you, as the lessee, were receiving all or substantially all of the benefit of the asset such that the lease was really as disguised purchase. Therefore these criteria looked at such things as whether title of the asset transferred to the lessee, and whether the lease equaled substantially all of the assets life measured in years or value.
As companies became more sensitive to liabilities on their balance sheets and as companies became more familiar with these rules, leasing companies specialized in designing leases so that they failed the capital lease test. Well, those days are soon to be over. With the new lease rules proposed by the FASB, all leases will now be capital leases. The details of these new rules are still being worked out (really, they have been working them out since the exposure draft was used in August 2010…but we are getting closer.)
As I mentioned, basically, all leases will be accounted for as capital leases. However, the devil is in the details. Some of the details that have “tentatively” been revised are:
1 – What is the lease term? Should all option periods be included?
Initially the board said yes. Now they are tentatively saying that only option periods that “there is a clear economic incentive for the lessee to exercise” must be included.
2 – Can short term leases be excluded?
Initially the board said no. Now they are tentatively saying that companies will have the option to recognize short term lease payments in the profit or loss on a straight-line basis over the lease term.
As of now, the boards have stated that they will issue a revised exposure draft in the first quarter of 2012 (it was formerly supposed to be issued in December 2011). So, in the mean time, keep posted as we anticipate the new future of lease accounting.
Kim Lubbers, CPA
Before posting a comment on a blog post please be aware that we do not give free advice to non-clients by email, comment response, or phone. Thank you!
- What is the Definition of a Public Business Entity?
- Changes to Requirements for Reporting Discontinued Operations
- Overview of the New Revenue Recognition Standard
- Being Aware of Your Debt Covenants
- Implementation Considerations for Adopting Guidance for Common Control Leasing Arrangements
- Quickbooks Inventory Short-Comings
- Percentage-of-Completion Method of Revenue Recognition
- Developing a Chart of Accounts
- FAF’s Private Company Council Active So Far
- Uncertain Income Tax Positions
- Accounting Standards
- Assurance Services
- Best Practices
- Discontinued Operations
- Employer Classification
- Goodwill Impairment Testing
- Internal Controls
- Mergers and Acquisitions
- Public Business Entities
- Segregation of Duties
- Unclaimed Property
Blogs We Like
- July 2014
- June 2014
- November 2013
- October 2013
- September 2013
- May 2013
- March 2013
- February 2013
- January 2013
- August 2012
- July 2012
- June 2012
- May 2012
- April 2012
- March 2012
- February 2012
- January 2012
- December 2011
- November 2011
- October 2011
- September 2011