May 16, 2013
By: Aaron S. Kaiser
On May 16, the FASB issued for comment what is expected to be the final version of the new lease accounting standards. Comments are due 9/13/13.
Here are the highlights of divergence from current GAAP:
For non-property (i.e. equipment leases) this is the proposed lessee accounting:
1. Recognize a “right to use asset” on the balance sheet (present value of lease payments) together with a liability for the present value of the payments to be made under the lease.
2. Unwind that asset and liability over the lease term by amortizing the asset and recognizing interest expense/repayment of principal as lease payments are made. The interest and amortization amounts are conceptually unlinked.
For most leases of real estate (meaning land and/or building) this is the lessee accounting:
1. Recognize a “right to use asset” and a lease liability much the same way as on the equipment side.
2. Unwind that asset and liability in such a manner so that the aggregate of the amortization and interest expense will be equivalent to what presently constitutes the straight line result obtained under current operating lease rules.
For equipment lessor accounting, if the lease is expected to consume “more than an insignificant” portion of the economic benefit constituting the asset, the lessor would de-recognize the asset and substitute the (total of) the residual value and present value of the lease at inception, and record profit on the difference on Day 1-and amortize the unwinding of the receivable in part to interest income/principal as payments under the lease are received.
Real estate lessors almost always will recognize income on the straight-line basis over the lease term as in current practice.
Special rules (as in the most recent prior exposure draft) for transition will measure leases as of the earliest date a financial statement is presented and NOT as of the inception of the lease (thankfully!).
The board will set an effective date for these new requirements after consideration of the feedback received during the comment period.
Obviously there will be a lot of details to sort out. The good news is that most of them have already been exposed previously.
Stay tuned for our more detailed analysis shortly!