FEI/Bosco: Weigh In on FASB Preference to Use Dual Approach



In a commentary posted on its website, the Financial Executives International Daily (FEI) provides a summary of the recently released FASB published “tentative decisions on the Leases project” reached at last week’s joint board meeting held with members of the IASB.

The FEI notes that although the two boards “converged” on numerous areas, they “diverged” in one major area: lessee accounting.

The FEI post is worth the read (see link below), but imbedded in the commentary was a comprehensive overview of this issue that was provided by leasing expert Bill Bosco, who expresses his views on FASB’s preference to use a dual approach that their board settled on at the latest FASB-IASB meeting. Outlined below are excerpts of his comments:

Bosco said, “I agree with the FEI’s Committee on Corporate Reporting [CCR] comment letter and the display approach described in FEI’s comment letters for accounting for operating leases/executory leases. In my opinion Type A accounting is only appropriate for capital leases (a financed purchase of the leased asset).”

Agreeing with the position taken in CCR’s letter, Bosco said, “I do not think that reaching a converged standard for lessee accounting in more important than keeping a two lease model using the display method of accounting for operating leases.”

He continued, “Forcing a Type A approach for all leases will cause U.S. lenders and credit analysts will lose key information regarding which leases are rentals vs. financed purchases of the leased asset. Moving to IAS 17-like classification tests with no bright lines should be acceptable to the IASB as that standard, except for the fact that operating leases are not capitalized, has been working effectively around the world since 1982.”

Additionally, Bosco pointed out, “Rental contracts do not creates debt obligations – most analysts say the operating lease obligations are debt-like, while capital leases do create debt obligations. I also think the FASB must align its definition of debt to the view of lenders and US commercial law. Debt should be defined as a liability that survives bankruptcy.”

“Further, I firmly believe that the two lease approach using the current GAAP risks and rewards framework and classification tests is the only approach that is conceptually sound as it accounts for the nature of the rights and obligations in a lease contract. The proposed Type A only approach does not distinguish between leases that transfer ownership rights (as well as rights of use) versus those that merely transfer rights of use”, Bosco said.

“The two lease approach is the only approach that provides lenders and the majority of analysts with the information regarding leases they need to make decisions. No approach will satisfy all users but the main objective of the project is to eliminate the need for users to adjust and only the two lease approach accomplishes that.

“Additionally using the display method and the two lease approach is much simpler for preparers. Under a Type A for all leases approach, they will have to maintain records using current GAAP’s risks and rewards framework as that is also the framework used by the U.S. tax and legal systems. Tax compliance and bankruptcy risk analyses done by users require information based on the two lease approach. The two lease approach avoids complex deferred tax accounting that would be an added burden for most operating leases if they must be accounted for using the Type A method.”

To read the full Financial Executives International Daily news release, click here.

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