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).

Related Articles

• June 2013 – White Paper – Leases:   Revised Exposure Draft
• February 2012 – Effects of Proposed Lease Accounting Standards on Transportation Companies
• August 2011 – FASB/IASB Update to Lease Accounting
• April 2011 – Convergence Process Extended to Ensure Quality
• March 2011 – Final Lease Accounting Standard Expected by End of June
  Note:  Since this article was published, the timeline for this project has been extended;
  a revised exposure is now expected in the first half of 2012.
• January 2011 – Illustrative Accounting Examples
• September 2010 – Proposed Lease Accounting Standard – Impact on Lessors
• August 2010 – Lease Accounting Exposure Drafts:  What You Need to Know
• July 2010 – Proposed Lease Accounting Change Could Impact Your Credit

Related Webinars

• October 2010 – FASB Proposed Lease Accounting Standard – What Every Business Executive Needs to Know

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