MHM Messenger: FASB's 2013 Proposal on Lease Accounting

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As the end of the comment period draws near for the FASB’s latest lease accounting proposal, many companies have already begun to analyze the potential impact on their operations. This proposal would make fundamental changes in the accounting for leases. Even though some details are controversial and may be fine-tuned before the new standard is finalized, companies are studying the proposal as it stands now because it is expected to have significant business as well as accounting implications. The effects are far-reaching because leasing is a prevalent business practice. Owners and managers of companies in just about all industries look to lease arrangements as a useful way to gain access to assets, obtain financing, and reduce their exposure to the risks associated with ownership of assets.

To help companies sort through the details of the FASB’s 339-page proposal, this MHM Messenger provides a brief overview of a general assessment approach. Also see our companion piece that answers many frequently asked questions (FAQs) about this topic.

Assessing the potential impact

While no single set of questions will work for every company, the following questions typically are key to a thoughtful and thorough assessment of the potential

September 2013

FASB’s 2013 Proposal on Lease Accounting:Why and How Companies Should Analyze the Potential Impact

impact of the proposal. In effect, each question is a step in the analytical process.

1. Which of our current agreements fall within the scope of the proposed guidance and meet the definition of a lease?

2. How would the application of the proposed guidance effect our financial statements, including the income statement and the balance sheet?

3. Would the effects of the differences between the proposed guidance and the current guidance have any regulatory or tax implications for our company?

4. Would the proposed guidance require any changes in our processes, systems or controls?

5. What would we do differently, if this proposed guidance were to be adopted? Would the proposed guidance prompt any changes in strategy, such as lease-vs.-buy decisions?

The analysis of the impact requires knowledge of the guidance in the proposal and judgment in applying the guidance, particularly in the areas that represent changes from current accounting standards. Our FASB’s 2013 Proposal on Accounting for Leases FAQs provide a brief overview of the proposed accounting guidance, highlight some of the key changes, and identify areas in which questions are likely to arise when assessing the impact of the proposal.

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In addition to reading the FAQs, companies may wish to consult with their accounting firms. Keep in mind that the effects of the lease accounting proposal are not limited to the financial statements.

Providing comments to the FASB

As companies assess the impact, they may find that parts of the proposal need clarification or they may identify areas where alternative guidance may work better. The FASB is seeking comments on some of the basic building blocks of the proposed approach, including the following:

• Definition of a lease. Do you agree with the definition of a lease and the proposed requirements for determining whether a contract contains a lease? If not, how would you define a lease?

• Lessee accounting. Do you agree that the recognition, measurement, and presentation of expenses and cash flows arising from a lease should differ for different leases, depending on whether the lessee is expected to consume more than an insignificant portion of the economic benefits embedded in the underlying asset? If not, what alternative approach would you propose?

• Lessoraccounting. Do you agree that a lessor should apply a different accounting approach to different leases, depending on whether the lessee is expected to consume more than an insignificant portion of the economic benefits embedded in the underlying asset? If not, what alternative approach would you propose?

• Classification of leases. Do you agree with dividing leases into property and non-property as

a way of differentiating between leases in which the lessee is expected to consume more than an insignificant portion of the economic benefits embedded in the underlying asset? If not, what alternative approach would you propose?

• Lease term. Do you agree with the proposals on lease term, including the reassessment of the lease term if there is a change in relevant factors? If not, how do you propose that a lessee and a lessor should determine the lease term and why?

• Variableleasepayments. Do you agree with the proposals on the measurement of variable lease payments, including reassessment? If not, how do you propose that a lessee and a lessor should account for variable lease payments?

• Transition. Do you agree with the proposed transition requirements that would require a lessee and a lessor to recognize and measure leases at the beginning of the earliest period presented using either a modified retrospective approach or a full retrospective approach? If not, what transition approach would you propose?

• Disclosure. Do you agree with the proposed disclosure requirements? If not, what changes would you propose?

• Nonpublic entities. Do you agree with the concessions for nonpublic entities? If not, what changes would you propose?

• Related party leases. Do you agree that it is not necessary to provide different recognition and measurement requirements for leases with related parties? If not, how would you change the requirements for related party leases?

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The information in this MHM Messenger is a brief summary and may not include all the details relevant to your situation. Please contact your MHM service provider to further discuss the impact on your financial statements.

Why your views matter

The FASB’s proposal is controversial, and the Board will be listening to feedback from accounting practitioners and their clients. The main reasons for the changes are to create a single worldwide standard and to make the accounting more useful for users of financial statements by addressing several longstanding criticisms of current accounting guidance. As explained in our related FAQs document, these criticisms include the off-balance sheet treatment for most leased assets and liabilities, as well as several areas in which disclosures are seen as insufficient. These areas include information related to operating leases in the financial statements of lessees and reporting of residual values of equipment and vehicles in the financial statements of lessors. There is general agreement on the objectives. But some of the details of the proposed changes have been difficult to work out.

As it stands now, the overall impact is controversial among accounting practitioners, companies, and even FASB members. Three of the seven FASB members voted against the proposal and presented alternative views in the exposure draft because they believe the changes do not represent an improvement in some respects. The dissenting board members expressed concerns that the proposed approach is too complex, there is no conceptual basis for some aspects of the proposed guidance, and the benefits will not justify the costs.

Planning ahead

Comments on the proposal are due to the FASB by September 13, 2013, although the Board will likely accept comment letters after that date. The Board is also hosting a series of roundtable discussions that will likely continue through early October.

The timing of the final standard will depend on the feedback received. We do not expect to see a final standard until 2014. Given the significance of the changes, we expect the effective date will be no earlier than 2017. But many companies are already evaluating the potential impact and planning ahead for the transition to new requirements.

Formoreinformation

If you have any specific questions, comments or concerns, please share them with Hal Hunt of MHM’s Professional Standards Group or your MHM service professional. You can reach Hal at [email protected] or 913.234.1012.