Leslie Seidman has been a member of the Financial Accounting Standards Board since July 2003 and is set to become acting chairman of the board on Oct. 1.
She recently talked with WebCPA to explain the boards new proposed standards for leasing contracts only about a week before FASBs oversight body, the Financial Accounting Foundation, unexpectedly announced that FASB Chairman Robert Herz will be retiring after over eight years on the job, but nearly two years before the expiration of his second five-year term (see FASB Chairman Herz to Retire Next Month).
Prior to joining the board, Seidman managed her own CPA firm, providing consulting services to major corporations, accounting firms and other concerns. She previously served as vice president of accounting policy at J.P. Morgan & Company. Seidman started her career as an auditor in the New York office of Arthur Young & Company, which is now part of Ernst & Young.
What are the main changes in the new proposed leasing standards?
One of the key features of this proposal is that its a joint release with the IASB. Weve been working together to issue a new proposed standard on lease accounting. The primary reason that were issuing the proposal at this time is that the current lease accounting model allows off-balance sheet treatment for significant assets and liabilities of lessees. Most investors are attempting to estimate those assets and liabilities, but the way they do it is to use incomplete footnote disclosure. So this proposal would require that all lease obligations be recorded on the balance sheet at the present value of the expected lease payment, along with an asset representing the right to use the leased asset, so youll hear people call this the right of use model. Youre going to have an asset on the books that represents the present value of the expected lease payments, along with an obligation to make those payments. The effect is similar to the accounting you would get if you purchased the asset outright and financed it, but only proportionately since its usually not the whole asset for its whole useful life. The boards believe that the proposal will improve the transparency and comparability of leasing transactions. Currently U.S. and international accounting standards on leasing are actually quite comparable, but both are criticized for permitting off-balance sheet treatment of significant amounts of both assets and liabilities. Very similar leasing arrangements can be accounted for very differently if they happen to fall on either side of the existing line between operating and capital leases. This enables structuring to achieve a desired accounting effect. The proposed standard will require all leases to be recognized, but only to the extent of the rights and obligations that they convey. If you have a short-term lease, you will have a relatively small amount on the balance sheet, whereas if you have a long-term lease, you will have a relatively large amount on the balance sheet. I call this a to the extent of model. In other words, its not an all-or-nothing on- or off-balance sheet model. Its the extent of what youre entitled to, or to the extent of what you owe. You put that on the balance sheet. One of the things that we like to say is that all leases will become subject to the same accounting standard. But whats actually represented on the balance sheet will depend on the terms of the arrangement. By working with the IASB, we think we can both improve and converge the accounting for this important area of finance.
Do you think there will be a lot of criticism of the proposal from companies that expect to take heavy losses or who are warning that its going to depress the market for commercial property leasing, that landlords are going to have to start re-negotiating leases with their tenants, or tenants with landlords?
Let me focus on what we expect to be the big changes, starting with the lessees. All leases will be on the balance sheet at the present value of the estimated lease payments. For a lot of lessees, this is the first time these amounts will be on the balance sheet. For some who had been doing capital lease accounting, all were doing is changing the amounts potentially, but for most lessees youre putting potentially significant amounts on the balance sheet for the first time. The initial amount is a present value amount, but subsequently these will be carried at amortized cost. The other big change for lessees is that it potentially changes the pattern and classification of the income and expense related to the arrangement. Today if you have an operating lease, essentially youre taking rental payments ratably over the term of the lease. What this proposal would say is put an asset on the books and amortize it, sort of like a depreciation expense, and then put a liability up and record interest expense related to it. First youve changed what youre calling these P&L items, and then youre changing the pattern of it because the asset will be amortized ratably and then interest expense will be recognized based on a declining liability amount. The pattern is just different from before, but again its intended to simulate the accounting if you were to buy it and finance it. If you have a more complicated arrangement, where for example rental payments are contingent on your sales or it has renewal options that are exercisable at your discretion, etc., this proposal will require that you make estimates about what those payments are going to be and how long you expect the lease to be outstanding. You may hear some folks talking about how its a more complex proposal, and I would submit that it depends on how complex your arrangement is. If you have a pretty straightforward lease with fixed terms, then I dont find the accounting for it particularly complex, except to the extent that you have to put something on the balance sheet and account for it. Its more complex than not doing that. I accept that potentially putting amounts on the balance sheet can affect leverage and ratios and things like that. We understand that most investors have been trying to do a pro forma adjustment to put these things on the balance sheet, and so its a question as to how big a surprise these amounts are going to be.
IASB Chairman Sir David Tweedie has often mentioned how hes never been on an airplane thats listed on an airlines balance sheet because of the existing leasing standards. How do you think its going to affect the airline companies now that theyre going to have to start putting these leases on the balance sheet?
The airlines are of course within the scope of the standard, and depending on the nature of their arrangements, whether theyre lessees or lessors, they will have amounts on their balance sheet that represent their right to use their aircraft. It depends on the terms of the lease how significant thats going to be. If you have relatively short-term leases, you will have relatively smaller amounts, but if you have relatively long-term leases, then you will have potentially significant amounts.
Do you think well start to see a lot more short-term leases now with the standard in place? Is that going to affect the property market in terms of lease terms and periods?
The proposal does include an exception for short-term leases. To the extent that you have an arrangement with a maximum possible lease term of 12 months or less, all you have to do is accrue the outstanding lease payments on any reporting date, and you dont have to go through the effort to amortize the rate of leased assets or accrue interest expense on the liability. Thats intended to be a simplification for people who have really short-term leases.
How long is the comment period for the standard?
Were planning to issue it for a four-month comment period. The comment period deadline will be Dec. 15. Thats the same exposure period that the IASB has.
Is your standard identical to the one that the IASB is proposing?
We are agreed on all of what I would consider the material aspects of the proposal. There are a couple of differences where the boards actually voted differently, but in my view they are secondary issues as opposed to primary issues. Its my hope that based on the insights we get from the comment letters, we will be able to resolve those completely in re-deliberations. But I will tell you there are a couple of other differences that I would consider legacy differences based on cross-references to other GAAP thats relevant. For example, if youre going to evaluate the right of use asset using your impairment standard, then we have a different impairment standard than the IASB has. We havent completely eliminated those kinds of differences, but they are not unique to leasing per se. There are a couple of differences where the boards voted differently on matters affecting leasing too. Again, I view those are secondary issues that were hoping to resolve during re-deliberations. I dont think there are any issues that are going to hold up convergence in this area. You had a 5-0 vote on the FASB in support of this proposal, and on the IASB, out of 14 members, there were 11 in support, one opposed and two abstained because theyre new board members. Thats very strong support for the proposal.
You and the IASB recently had to postpone the date for when some of the standards had to be finalized. Is this one of the standards that had to be postponed?
No, we essentially went through and identified which projects we were going to view as priorities, in other words, where the need for improvement and convergence was significant, and make sure those got done in the timeframe that we had originally established. Leasing is one of those. We are still hoping to resolve the re-deliberations in the first half of next year and that is the original timeframe for this project. Were hoping to issue a final standard on or about June 30 of 2011.
How about the other projects that have been pushed back a bit? Do you think youre still on track to get those done by the end of next year?
Weve issued a revised timeframe. Were still on board with convergence and to achieve our deadline. We have not yet set an effective date for the leasing standard, and the reason for that is there are several proposals and joint proposals out for comment right now, and what we are planning to do is ask constituents to comment on the best way to introduce all of these new proposals in terms of transition and effective date as a separate proposal, Usually we look at these things one standard at a time, but because theres such potential for significant change here, were going to ask people to help us think that through for all the standards together. Were hoping to issue that in September or October for comment, and after we get the feedback on that and the individual exposure drafts, well set an effective date for this standard and other standards.
Do you think they will all go into effect at the same time?
I cant comment on that yet. We really are interested in peoples views about whether perhaps theres a logical order to roll these out. Perhaps its easier for people to implement them all at the same time, or perhaps some people would prefer to stagger them for various reasons, so were very open to comment on that.
I understand that some people have complained that too many standards were being introduced at once, and that was one reason why you had to stagger them more and push some of them out toward the end of next year?
My perspective on that is the primary reason for that was that people wanted to be able to comment on them, in other words, analyze the proposals and give us their thoughts on the proposals. I hadnt heard specific feedback yet that people were concerned about implementing them all at the same time. That will be the subject of this other proposal. It may well be thats what they tell us, but I havent heard that feedback yet.
So youre going to put out a separate proposal asking people what timeframe they would like to see these rolled out?
Yes, how much time do they think they need to implement the standards, and whats the best way to do it. Should they all be effective at the same time or should the effective dates be staggered?
Do you think it would be something along the lines of what they had for the Sarbanes-Oxley 404 rules, where they had large accelerated filers and non-accelerated filers?
We would not express it that way because we dont write those rules, but one thought that has been raised is that perhaps there would be a deferral or a size cut for who would go first and who would go second. Another way to look at it would be public companies versus private companies, etc. All of these are open questions that we will be asking for feedback on.
Is it possible that the leasing standards might be deferred for certain industries, say if the airline industry had a lot of problems adjusting to certain standards or the commercial property industry had problems adjusting? Would it be rolled out differently by industry?
At this point were interested in getting peoples feedback on the proposed accounting and disclosure requirements that were putting forth. Were very interested in hearing from all constituents about what they think of the proposal, how operational it is, whether they think its producing information thats useful for their investors, etc. We are looking for companies that will be willing to participate in fieldwork to discuss and test the provisions of the proposal. Anybody who is interested in volunteering for that should let us know by September 15. If there are particular industries that would like to meet with us and share their perspectives about the proposal, were very interested in doing that.
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