Just as we begin to emerge from one of the most significant recessions in history, the biggest changes to U.S. and international lease accounting since the mid-1970s, when FAS 13 and IASB 17 were issued, are on the horizon. Since 2002 the Financial Accounting Standards Board (FASB) in the U.S. and International Accounting Standards Board (IASB) in Europe have been working on various projects to converge certain standards of accounting on a global basis.
In 2006, the FASB and IASB jointly announced that one of the projects to be undertaken would be the reconsideration and convergence of the standards of accounting for leases. Much of the focus of these discussions since that time has been on lessee accounting issues. With the recent shifting of focus to the lessor side of the equation and the ensuing developments, it is very prudent for leasing companies to begin preparing for the expected impact to their existing accounting policies, credit decision processes and financial statements. At a fundamental level, the underlying lease management systems that manage their operations and accounting need to be reviewed, modified and tested for compliance.
An exposure draft of the new standard is anticipated to be issued in July or August 2010, with a four-month comment period. It is expected that final standards will be released during 2011 with tentative implementation starting in 2012. Based on the most recent joint FASB/IASB board meetings in April, May and June, the following is a summary of the key changes related to lessor accounting:
The time and resources to perform this analysis will be significant and the cost to upgrade by making additional investment in existing software or new systems will need to be quickly incorporated into upcoming budget planning cycles for 2011 and beyond. In general, systems that employ a more configurable and flexible design (for example object oriented/templatized GL interface) should be able to support required changes in the least disruptive and most cost-effective manner.
The requirement for leasing software to be flexible and easily adapt to change will not end with the adoption of these new standards of lease accounting. Even more waves of change are on the way. As the FASB and IASB continue to work towards convergence, it is only a matter of time before U.S leasing companies will have to comply with the newly converged International Financial Reporting Standards and not merely U.S. GAAP. The impact of these new and ongoing changes on accounting policies and system requirements is an additional topic of discussion for another day.
Madhu Natarajan is the chief executive officer of Odessa Technologies, Inc. Natarajan has been with Odessa since 1998 and brings extensive experience in software technologies, lease management and lease accounting. He has spoken on a wide range of leasing topics at various national and international forums. Natarajan graduated magna cum laude from Monmouth College with a degree in Computer Science and minors in Business Administration and Accounting.
Joe Sebik is a managing director of FinServ Advisors, LLC, an independent consulting firm that provides technical accounting and tax planning, transaction structuring and implementation support and consulting services to the leasing and financial services industry. Sebik is a CPA with over 25 years of leasing industry experience with major public accounting, banking and industrial leasing companies, has published numerous Accounting Policy and Practice reference texts for the Bureau of National Affairs and is a long-term member of the ELFA’s accounting committee.
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