Roundtable panelists in Norwalk--during the afternoon session of the Financial Accounting Standards Board and the International Accounting Standards Board’s lease accounting discussion Sept. 23 found consensus on one critical issue related to the proposed lease accounting standard:  that identifying assets and the liabilities that are in leases and putting them on balance sheets is the correct goal.

Panelists however in general said the dual model being proposed in an effort to facilitate that goal would result in very complex reassessment and financial statement effects thereafter.  It was this aspect of the proposal that was the focus of the discussions.

Exxon Mobil Corporation’s accounting policy manager Joe Horne said for the oil and gas industry the proposed standard would reduce transparency and comparability.

 “For oil and gas business especially where we have proportionate consolidation, it is a huge step backwards,” said Horne.  “It will make things not comparable among companies in the industry and not comparable among partners in the same project, operators can have different financials than non operators, so we have grave concerns about proposal as it is, we add our voice to others that say there’s got to be an easier way,” he said.

Type A versus Type B.

The revised lease proposal titled: Leases (Topic 842): a revision of the 2010 proposed Accounting Standards Update, Leases (Topic 840), was issued in May.   The proposal aims to address issues of transparency and faithful representation that current lease accounting is said to be deficient in. Some 580 comment letter responses were submitted to the boards, a FASB staff person said.

The guidance, which is the boards’ second attempt at revising lease accounting, would require all entities to recognize assets and liabilities arising from a lease.  

The boards propose a dual model approach for both lessee and lessor accounting: one for Type A leases namely—equipment, aircraft, cars trucks; and one for Type B leases—land, a building or part of a building.

Generally for lessees, the entity would look to the underlying asset to determine whether it would be a Type A or Type B lease. The difference is Type A lease would have amortization and interest expense, and Type B leases would have straight line frontal expense.

During the US roundtable, FASB member Lawrence Smith said there is a fundamental difference in the lease model being proposed versus the model that is currently being used under U.S. GAAP. 

The proposed lease model is based upon the notion of a right-of-use and that that is the asset, and the correspondent liability would be associated with it, said Smith.

With existing GAAP both in the U.S. and under IFRS, the underlying model is that an entity focuses on the underlying asset and the entity either has a sale of an asset or the equivalent of a sale of an asset or it does not, he said.

Thinking of Users.

Though panelists were preparers from various sectors including oil & gas, retail, corporate real estate, accounting firms and others, a number of them raised concerns that the boards ensure that the final standard provides financial statement users with information that they find comparable and transparent. 

“We need to make sure [the model] is of benefit to the users; to the investors—because putting it on the balance sheet will have a significant amount of cost to it,” said Bob Uhl, a partner at Deloitte & Touché LLP.  “And if we find out users are just taking that off the balance sheet and putting their own numbers on, then we’re not achieving any of the objectives,” he said.

But Exxon’s Horne said the model will not help users since it uses a theoretical approach and does not take into account the variety of leases that currently exist. 

“Are there two types of leases?—to me that’s like trying to describe a rainbow using the colors red and blue—there’s probably many, many types of leases and if the boards continue to focus on a disparate number of types of leases and do different accounting for them, they’ve lost sight of what financial statements exist for,” said Horne.

Financial statements exist to help users, said Horne.  “They don’t exist to satisfy some theoretical construct and going down the path of the proposal is a very theoretical approach which leads to some interesting, far flung accounting entries that will be scattered all over our financial statements,” he said.

. 4.

Retailers Don’t Like it.

The Sept. 23 roundtable is the boards’ third. Two other roundtables have already been held-- in Brazil Sept. 10; and in London Sept. 16.  Two additional roundtables will be held, one in Los Angeles on Oct. 3 and the final in Singapore Oct 4.

Among the retailers on the panel, they said the proposal would have substantial impact.  Retail panelist Anita Elliott, Senior VP/Controller for Dollar General Corp., said she echoed concerns of other panelists regarding complexity of the proposed model as well as its lack of cost benefit.

The changes would have substantial impact since Dollar General has over 10,900 stores in 40 states, substantially all of which are subject to operating leases, Elliott said.  In its last three fiscal years, Dollar opened 1,850 stores, almost all of which are leased. In addition, it generally renews or renegotiates approximately 1,000 to 2,000 leases on an annual basis.

Elliott said her company has over ten thousand operating leases and therefore the proposed accounting would be a significant undertaking and would not accomplish the intended objective, which is, to prove an accurate representation of leasing transactions.  “We struggle with the practicality of the proposal as it stands,” she said. “I have concerns about the dual model approach as well,” she said.

Another panelist, Susan Grafton, a member of the financial leaders council of the Retail Industry Leaders Association (RILA), stressed the importance of accounting simplicity stating that judgments required by the proposal could create implementation issues.

RILA members include more than 200 retailers, product manufacturers and service supplies. Grafton suggested disclosures plus a simplified model as a potential approach.

By dlugo@bna.com |Denise Lugo|