What’s in the Lease Accounting Exposure Draft?

A quick guide to FASB’s proposed standards from Bloomberg BNA

In for the long term In for the long term

All leases of personal and real property with terms longer than 12 months and no right to renew would be capitalized, i.e., brought onto the balance sheet of the lessee.

Short-term leases can stay off the balance sheet Short-term leases can stay off the balance sheet

The new leasing proposal allows an election to use the existing operating lease method (off-balance-sheet to lessees) for lease transactions of 12 months or less.

New distinctions New distinctions

The current distinction between operating leases and capital leases would be replaced by a new so-called asset/liabilities approach in which the right to use a specified asset (the asset that is capitalized) is conveyed, for a period of time, in exchange for the obligation to pay rent (the liability that is capitalized).

What will be left? What will be left?

The proposal introduces a new dual expense recognition and balance sheet presentation approach in which there are two types of leases for lessees, based on “consumption” of the value of the underlying asset being leased.

The first new type of lease … The first new type of lease …

Under this new classification, lessees would report a straight-line lease expense in their income statement for leases that do not consume a more than insignificant portion of the asset (aka Type B leases). This would include most real estate leases. Lessors of Type B leases would use the operating lease method of accounting.

… And the second … And the second

For leases (aka Type A leases) that are deemed to consume more than an insignificant portion of the asset -- such as trucks, tractors, planes, and so on -- the lease expense would be front-loaded, similar to interest in a mortgage or capital lease accounting. This would include most equipment leases. Lessors of Type A leases would use the Receivable and Residual method of accounting that is very similar to direct finance lease accounting under current GAAP.

History History

Leveraged lease accounting in the U.S. would be eliminated under the proposed rule.

Waiting for the response Waiting for the response

The comment period deadline for the proposed Exposure Draft is Sept. 13, 2013. The boards will then review all comments and re-deliberate if necessary.

The timeline The timeline

The boards hope to finalize the rule in 2014, with an effective date of 2017 when lessors and lessees have to transition to the new rule.

To learn more about the new lease accounting proposals, attend Bloomberg BNA’s webinar, “Changes in Lease Accounting: Analysis and Implications for Your Business” on Thursday, June 27. To register, click here.

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