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Wednesday, July 3, 2013
NORWALK, Conn -- For some years, accounting rulemakers and their advisers have spoken occasionally about the Financial Accounting Standards Board being a ‘change agent,’ and that often change is hard.
From initial reactions to the May proposals of FASB and its international counterpart for a lease accounting overhaul, the sizeable change to practice – though less, and less onerous, than that heralded by a 2010 draft – will be questioned and questioned again. The rulemaking ride could be bumpy.
A June 27 webinar, co-sponsored by Bloomberg BNA and the Equipment Leasing and Finance Association, suggest there are some positives, more negatives, and plans for some coordination by ELFA in trying to ensure that FASB and the International Accounting Standards Board hear equipment lessors’ concerns about the exposure drafts.
A series of public roundtables on the leases proposals – set for Sao Paulo, London, Norwalk, Los Angeles and Singapore -- will certainly help in the transmission of messages and their reception by the boards. Those sessions start Sept. 10.
“I think that the overall model is much better” than the previous lease accounting proposal, John Bober, global technical controller at GE Energy Financial Services, said during the BBNA-ELFA webcast seminar. Bober called the May 2013 revised exposure draft by the U.S. board, significantly different from its predecessor.
One thing that hasn’t changed, he added: in accounting “primarily driven around” reporting by lessees, a right-of-use asset would be booked on the balance sheet to represent the lessee’s right to use the leased asset. The lessee also would recognize a liability stemming from its obligation to make lease payments, Bober said.
Over the webcast workshop’s next 90 or so minutes, Bober; Bill Bosco, chief of consulting firm Leasing 101 and a long-time ELFA delegate or ally; and Betty Davis, an Ernst & Young partner, drilled down into how the not-uncomplicated proposed lease accounting standard of FASB would be applied.
That lack of simplicity in the model – which had started out as a relatively simple, albeit controversial blueprint three years ago – has become a lightning-rod issue in the initial discussions of the proposal.
To Be “A” or to Be “B”?
In addition, definitional issues remain. Some of those in turn relate to judgments that are to be made in classifying leases as either “Type A,” which would follow an interest and amortization model, or “Type B,” keyed to a “single lease expense” template, as the webcast discussants stated.
It’s presumed that most equipment leases would fall in the Type A category, marked by front-loading of expense, according to the webcast discussion. Real estate generally would fall into the Type B category, which calls for straight-line expensing.
A key question in the accounting, described as an underlying “principle” by E&Y’s Davis and Bosco, is whether the lessee consumes more than an insignificant portion of the leased asset. If the leased asset is equipment, the Type A accounting, with interest and amortization featured, would be in order unless the “lease term is an insignificant portion of the economic life of the asset” or the “present value of lease payments is insignificant relative to the fair value of the leased asset.”
Use of the term “insignificant” represents a big change from current generally accepted accounting principles, they suggested. Davis, the auditor, predicted some pressure on the use of the term. It may take a while for the practice to settle.
“We don’t have quite as much of, I’ll say, a roadmap on what does ‘insignificant’ mean,” she said. “And it has a lot of impact in terms of this model on equipment leases.”
Bosco, who for several years has criticized the boards’ general and specific direction in lease accounting, highlighted a few “good news items.” An example: the boards calling for the lease term to include the “non-cancellable period, plus any optional period where there is ‘significant economic incentive’ to extend (or not terminate) the lease,” as stated in one slide.
However, Bosco did not have good words for what he argued is a lack of solid, well-defined principles undergirding the leases classification scheme.
He referred to a specific slide in saying: “And we put ‘principle’ in quotes, because I don’t see the principle here. I see mixed principles. I see one principle for equipment leases, one principle for property.”
“And property is closer to what we are used to in current GAAP, and current legal and current tax regimes,” he added. “But certainly the ‘insignificant’ concept breaks the link between equipment leases and their classification, and how the [Uniform Commercial Code] and the IRS treat them.”
Dynamic of FASB Membership, Numbers
The normally seven-member FASB, made up of six members as July started, supported issuance of the leases proposal by a 4-to-3 vote. Today, without Leslie Seidman, the former board chairman, the panel is evenly split on lease accounting. The three members who recorded dissenting, “alternative views” on the proposal – Thomas Linsmeier, Harold Schroeder and Marc Siegel – remain on the board.
The trustees of the Financial Accounting Foundation, FASB’s parent, are busy searching for a seventh board member, to head off such tie votes. The stance on leases of the member yet to be named likely will be crucial -- presuming no changes of heart occur among current FASB members.
It’s more likely than not that the new member will be drawn from the community of financial executives or accounting officers at a very large U.S. company, according to my recent reporting. As shown in a comment letter sent to FASB in late June by a list of mainly sector-specific trade groups (plus the Chamber of Commerce), much of corporate America so far appears to not be enamored with the long-gestating FASB-IASB overhaul of lease accounting rules.
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