Lease Accounting

On August 17, 2010, the U.S. Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB) proposed major changes in the way both lessees and lessors account for leases. In July 2011, the boards determined the extent of feedback from the original exposure draft and the resulting changes to the proposed standard were of such significance that a second release (re-exposure) should be made; this re-exposure is expected to be released in the first half of 2012. While no effective date has been established, many believe the standard eventually approved will be effective no earlier than 2015.

BKD continues to monitor this ongoing deliberation and we expect to issue updated guidance and discussion once the second exposure draft is released. In the meantime, the articles and presentations linked below will provide some background on the significant issues being discussed. For the casual reader, be aware of the following major changes (tentative as of November 15, 2011) likely to result from the final version of the standard:

  • The lease definition will include the fulfillment of a contract dependent on the use of specified assets when that contract conveys the right to control the use of those assets for an agreed-upon period of time.
  • Lessees will have a single method of accounting rather than the current concepts of operating and capital leases, resulting in a right-of-use asset and lease liability.
  • Lessors will also have a single method of accounting, but with thresholds for profit recognition, resulting in right-to-receive lease payments and residual assets along with deferred revenue:
    • A lessor’s lease of investment property would NOT be within the scope of the receivable and residual approach, resulting in the continued recognition of the underlying asset and lease income over the term.
    • Both lessee and lessor accounting will remove the concept of off-balance sheet accounting for certain leases, resulting in large previously unrecognized assets and liabilities being included in financial statements.
    • Income statement recognition for each lease will result in an accelerated recognition of lessee expense reflected by the depreciation of a right-of-use asset and interest expense on the lease liability instead of straight-line rent expense. Lessor recognition will vary based on the expected certainty of profit from the transaction.
  • Short-term leases (12 months or less) will continue with current “operating lease” accounting, but will require additional disclosures.
  • Lease terms will be defined as the noncancellable period together with options when there is a significant economic incentive (significantly changing the exposure draft’s approach to renewal terms).

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Travis Webb

Managing Partner

Travis Webb

Managing Partner

Wells Fargo Center
1700 Lincoln Street, Suite 1400
Denver, CO 80203-4514

Denver
303.861.4545

Jerry Henderson

National Industry Partner
Audit

Jerry Henderson

National Industry Partner

Audit

Manufacturing & Distribution

600 N. Hurstbourne Parkway, Suite 350
P. O. Box 22127
Louisville, KY 40252-0127

Louisville
502.581.0435

Request a BKD Speaker

Do you want a BKD professional to speak to your group about how the proposed lease accounting changes could affect your organization? Fill out the form below and someone from BKD will contact you with more information.