The U.S. Financial Accounting Standards Board inched closer to changing the bookkeeping treatment for leases, a move that has the accounting and commercial real-estate industries buzzing.
With the International Accounting Standards Board, Norwalk-based FASB published an exposure draft on proposed changes for how lease contracts are accounted, one of the main goals arising from a 2006 memorandum of understanding between the two entities.
Under current standards, leases are split into two categories: capital leases, which must be reported on balance sheets, and operating leases, which are allowed to stay off the books if worded correctly in contracts. FASB says this results in an understatement of assets and liabilities, and allows companies to structure leases to achieve accounting goals like higher profits, while making it harder to compare results of companies that treat leases in different ways.
FASB wants investors to get a complete picture of any company”™s leasing activities when viewing a balance sheet, including variable features such as renewal options and contingent rentals.
Existing leases would not be “grandfathered” and would be immediately subject to the new rules, leading some to anticipate sharp increases in debt reported by some companies when the new rules are adopted, with no date yet set by FASB and IASB.
In short, lease accounting is about to undergo a fundamental overhaul, according to consultants with Deloitte Inc., which has a large office in Wilton. Deloitte”™s Scott Cerutti, Jeff Nickell and Beth Young addressed the topic in a recent note to clients.
“The elimination of ”˜off-balance-sheet”™ financing eliminates one of the advantages of leasing,” the trio stated. “This could result in a push toward shorter-term leases, or buying an asset rather than leasing it. Lessees would need to balance this consideration with potentially higher rents for shorter-term leases as well as reduced amortization periods for leasehold improvements.”
Since first broaching the topic in 2006 and publishing an initial draft last year, FASB and IASB have received more than 300 letters commenting on the proposal, including from Fairfield-based General Electric Co., Hartford-based United Technologies Corp., and the New York State Society of Certified Public Accountants. The joint FASB-IASB working group on lease accounting includes John Bober, a managing director with Stamford-based GE Energy Financial Services.
For its part, GE had urged FASB and IASB to address both sides of a lease transaction in tandem, and not to rush into a final decision.
“Leasing involves a wealth of transactions, and the terms of the arrangements vary considerably across the transaction spectrum,” wrote Jamie Miller, controller of GE, in a June 2009 letter to FASB technical director Russell Golden.
Both sides of varying arguments have been debated during the comment period. For instance, UTC expressed a preference for excluding short-term leases from the requirements, saying it would constitute an administrative burden; the New York State Society of CPAs took an opposite tack.
“We do not believe that there should be any special exclusions or ”˜bright lines,”™ ” wrote NYSSCPA”™s Abraham Haspel and Edward Ichart, who drafted the society”™s response. “Non-core assets should be included because accounting for similar items should not be based on a subjective entity perspective. In the case of short-term leases, any cost-benefit issues can be adequately addressed by the general materiality convention.”
The organizations are accepting comments through Dec. 15 before finalizing a decision.
FASB and IASB are seeking volunteers to sign up by Sept. 15 for confidential fieldwork to access the costs and benefits of the new standard.
