Proposed Lease Accounting Rules Update

4/14/2011

By Lindsey Hengeli, CPA

In August 2010, the Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB) issued a joint proposal to change the way companies account for leases. Under the original exposure draft all leases of a lessee would appear on the balance sheet, eliminating off-balance sheet accounting. It also eliminated the distinction between operating and capital leases.

After significant pushback during the comment period, the FASB and the IASB have agreed that there is a need for two categories of leases. The two categories currently being discussed are as follows:

• A financing lease would be treated like an installment purchase, putting an asset on the balance sheet and a correlating liability to be paid down over time. This approach is similar to the existing capital lease method.
• “Other-than-finance” leases would also appear on the balance sheet, but would flow through the income statement like today's operating leases because the financing element would not be considered significant

Another noteworthy change being considered surrounds renewal options. Under the updated proposal, renewals should only be included in the upfront value if there is a significant economic incentive for the company to extend the lease.

The new lease accounting standards are expected to be finalized during second quarter 2011. We will continue to monitor these developments and keep you up-to-date on any new information.