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Lease Accounting: With an Abundance of Issues, Is a New Method Near?

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Written By: Gray Deemer

The Financial Accounting Standards Board’s (FASB) latest lease proposal continues to run into opposition from various parties. The current proposal would, for the most part require leases to be reported on a company’s balance sheet, a fundamental shift from the current practice of recognizing rent expense for operating leases. On the income statement, the transaction would be realized under a two part model, based upon the nature of the leased asset – as either financing (i.e. front-loaded expense) or straight line over the lease term (ratable). To an extent, the accounting profession supports this dual model for income statement recognition, although basing the treatment upon the nature of the leased asset rather than the true economics of the transaction has created some criticism. Many would favor an alternative approach “based on whether the lease in effect, transfers the risks and rewards of ownership such that the company that is leasing the asset has, in substance purchased the asset (i.e. indicators of effective ownership)”. This appears to be a logical alternative that may in fact assist in curbing some of the opposition towards the current proposal. Many companies will push for short-term leases in an attempt to keep the leases “off the books” as one year or less leases will continue to be accounted for under the old model. The FASB has attempted to block the shifting of long-term leases into short-term leases by insisting that leases of 12 months or less include an option to extend, which must be taken into consideration.
The revised draft still requires the lessee to recognize assets and liabilities or rights and obligations created from the lease, but it does not change the method of determining expense recognition and other reporting that was introduced in the original draft. Currently, the FASB may give final approval after comments are received, as early as 2014, and then phase in the new rules by 2017.

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