GASB Lease Accounting Change Project at Odds with FASB Approach

by Bill Bosco

Bill Bosco is the principal of Leasing 101, a lease consulting company. Bill has over 37 years of experience in the leasing industry. His areas of expertise are accounting, tax, financial analysis, structuring, pricing and training. Bosco has been on the ELFA accounting committee since 1988 and was chairman for 10 years. He is a frequent author and speaker on leasing topics. He has been selected to the FASB/IASB Lease Project working group. He can be reached at, or 914-522-3233.

Leasing 101 Principal Bill Bosco urges your comments on the FASB/IASB lease accounting project as it pertains to government and municipal leasing.

On November 11, 2014, the Governmental Accounting Standards Board (GASB) issued a Preliminary Views document on a project to change current GASB lease accounting GAAP, but it is in line with the IASB approach rather than the FASB approach that captures the substance of leases in the accounting. The GASB accounting rules currently incorporate the FAS 13 lease accounting rules.

FASB/IASB Approaches

The main objective of the FASB/IASB project is for lessees to capitalize all operating leases, other than short term leases. The FASB and IASB are not converged on lessee accounting — the IASB adopted a capital lease accounting for all lease models, which the GASB is following. The FASB is keeping the current GAAP substance based lease classification tests in place (with minor changes) and treats capitalized operating leases differently from capital leases (i.e., the operating lease cost is the straight line rent expense and the operating lease liability is reported as an “other” liability — not debt).

GASB Proposed Approach

The GASB proposes that lessees apply capital lease accounting to all leases to simplify lease accounting. For the capitalized operating leases, the P&L lease cost is front loaded as interest is imputed on the liability and the resulting liability is classified as debt.

The Impact

This proposed change should cause an increase in the cost of debt to municipalities. The GASB is not planning to reflect leases according to their substance, which will negatively impact three of the measures and ratios used by Moody’s to develop muni bond ratings. The result is a new and flawed accounting theory raising the actual cost of debt.

Accounting does matter! They are breaking with the long tradition of adopting FASB pronouncements as GAAP for governmental entities. They are ignoring important independent organizations’ comment letters to the FASB/IASB project (American Accounting Association, AICPA, among others) that support the FASB two-lease model because it gives lenders/credit analysts the necessary information regarding operating leases to make credit judgments. Without the two-lease model’s reported financial information regarding what is really debt and rent expense, municipalities will have to recast their accounting to get relief from rating agencies and lenders. Simplicity is a noble goal but the results must be “right.”

What do you think: Is it important that government lessee/lessor accounting be treated as the FASB plans, or as the IASB plans? If you wish to comment to the GASB on their project, you must do so by March 6, 2015.

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