Companies to Get Cost-Relief Option in Lease Rule Transition

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By Denise Lugo

Companies adopting new lease accounting rules will likely get some relief from costs when shifting to the rules because of an option that U.S. accounting rulemakers will provide.

The Financial Accounting Standards Board Nov. 29, voted 6-1 to amend transition requirements under new leases rules, which will enable companies to opt out of having to restate the effects of the new standard as if they were applied to earlier reporting periods.

The new leases rules, ASC 842, as written, would require 2018 and 2017 periods to be restated when companies present their 2019 financial statements. This is a costly requirement because it will require new systems, which won’t be ready, board discussions indicated. Financial statement preparers asked the board to provide transition relief in this area.

“I am sympathetic to providing additional time, there are a number of changes as you unfold the standard, that it’s not as simple as some initial discussions about it being a display approach,” FASB Vice Chairman James Kroeker said.

“We changed the definition, people are working through what that means; we changed the discount rate—putting it on balance sheet now requires you to track two pieces of data for foreign exchange—so a number of changes and I think people want to get it right,” he said.

FASB will propose its transition relief in January and give 30 days for comment, according to the discussions.

The board’s decision comes a year after it issued the new leases rules that will bring—for the first time—operating leases on companies’ balance sheets. The rules take effect in 2019 for public companies, but can be adopted now. Some companies, like Microsoft Corp., already adopted the standard.

Following FASB’s decision, a lease accounting software vendor told Bloomberg Tax the relief companies need is legitimate given the depth of the challenges, and therefore the board was correct in its decision to provide it.

“But they should not have provided it because the big software vendors are years behind the curve, when there are players today that large global companies are using,” said Michael Keeler, chief executive officer at LeaseAccelerator Inc., a provider of lease accounting software to global companies like Cummins Inc., Eaton Corp. Plc, Tyson Foods Inc., and Salesforce.com Inc.

The whole purpose of this standard was to level the playing field in terms of providing apples-to-apples transparency and comparabilty to your average investor, said Keeler. Under the revisions, “auditability will be there but not transparency and comparability,” he said.

CFOs Complained of Systems Lag

The forthcoming transition option stems from requests made by chief financial officers, treasurers, and others who said providing comparative period reporting requirements would add significant costs.

“They’re finding that new systems need to be implemented,” a FASB staff accountant told the board. “Because of the lack of system providers that will be ready in time for entities to be ready to adopt on a timely basis, that’s leading to a lot of the complexities and the costs in the comparative period of reporting that’s currently required,” staff said.

Under the amendments FASB voted to adopt, companies could choose a cumulative catch adjustment to the beginning of the period of adoption.

Companies would continue to use old leases rules, ASC 840, in those comparative periods—excluding ASC 840 disclosures. The other transition requirements under the new leases rules would remain relevant, including all of the exceptions the standard provides.

Investors, Analysts Might Protest

The board’s decision might stir some protests from investors and analysts, FASB member Harold Schroeder, the main dissenter to the change, indicated. Schroeder—who generally provides analysts’ and investors’ perspectives to standard setting discussions—expressed concerns that those financial statement users weren’t approached by staff accountants when they weighed the recommendation to provide the transition option.

“Though preparers would get cost relief, users won’t,” Schroeder said. “I can’t envision that users are asking for this., I don’t think we’ve heard ‘we don’t want comparative information, we heard ‘we want comparative information.”

Though preparers would get cost relief, said Schroeder, cost would be added to the user side, and they won’t have the initial comparability they crave upon initial adoption—critical to them during a data-driven age.

“What’s become more and more clear to me, there’s significant shifts in leasing strategies, which reflects shift in new business—they’re entering, existing whatever it may be,” Schroeder said. “Taking away this comparative information is masking that notion.”

To contact the reporter on this story: Denise Lugo in New York at dlugo@bloombergtax.com

To contact the editor responsible for this story: S. Ali Sartipzadeh at asartipzadeh@bloombergtax.com

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