FASB and IASB Reconsider Lease Accounting Rules

At the end of February, the Financial Accounting Standards Board (FASB) and its international counterpart, the International Accounting Standards Board (IASB) met in London to redeliberate some of the more complex and controversial aspects of the anticipated exposure draft. After proposing broad sweeping changes last fall to the accounting and reporting rules addressing the leasing of assets, the Boards appear to have retreated on certain elements.

The FASB and IASB are now proposing that renewal options be considered in the upfront value only if there is significant economic incentive for a company to execute the extension.Previously, the proposal required a multi-scenario 'more likely than not' analysis of the expected lease term.

For variable lease payments, the original proposal required the use of complex projections to estimate the ultimate obligation. In light of significant objections raised by practitioners, the Boards' redeliberations have yielded a compromise whereby only certain types of contingencies (like those tied to index or rate) will be included in measuring lease obligations.

Lastly, the FASB and IASB have asked for further outreach to the business community about whether two separate models of recognition need to be used for both lessees and lessors (termed as 'finance' leases and 'other-than-finance' leases).

Companies need to take note due to the probable retrospective application of these changes to standard financial statements. It is expected that companies will need to follow the new lease reporting guidelines before the 2014 proposed effective date. The need to commence with the activity of gathering and excerpting all lease data in preparation for the new rules is vitally important. Many companies are appropriately gathering lease documents, creating databases, and ensuring they understand the potential impact – especially if other strategic initiatives are underway. Beyond accounting, many of the newly anticipated standards expected under the convergence of US GAAP and IFRS will necessitate substantial lead time to study the potential impact on business operations, human resources, technology and the overall time and cost needed to achieve compliance.