AICPA Proposes a Simpler Approach in Dividing Type A and Type B Leases Under Proposed New Lease Accounting Standard

In May of 2013, in an attempt to improve the accounting treatment of leasing transactions, FASB/IASB issued a Revised Exposure Draft, proposing to classify all leasing transactions into either Type A or Type B.

Under the Revised Exposure Draft:

  • Type A leases would include leases that have a more-than-insignificant amount of the value of the asset consumed during the lease period.  
  • The leases with an insignificant amount of the value of the asset consumed would be categorized as Type B. 
  • A lessor would use a current operating lease model for Type B leases (includes most of the real estate leases), while accounting for Type A leases would require capitalization of lease receivables and de-recognition of the underlying asset.
  • Type A lease accounting for a lessee would result in more interest expense in the earlier periods of the lease (front-loading the overall expense charge), whereas a straight-line basis would be used in a Type B lease.

The proposal in the Revised Exposure Draft is expected to create additional costs and complexities, while not significantly improving the current accounting treatment of leases. It would also make it difficult to categorize certain type of leases as either Type A or Type B.

While supporting a dual-model approach for lessor and lessee accounting, the AICPA Financial Reporting Executive Committee disagreed with the proposed tests that would determine whether a lease is classified as Type A or Type B lease. It called for a simpler approach based on the economics of the lease and recommended that all leases, other than those consistent with in-substance finance purchases, be accounted for as Type B leases.

It’s unclear what impact this “dissent” will have, if any, on the timing and substance of the next exposure draft (which was thought to be the final one) due out shortly.

Dmitriy Gelfand is the Real Estate Services Group Senior Manager with experience in public accounting, providing audit, tax and consulting services to clients in real estate and hospitality industries.

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