Regular Monitor contributor Bill Bosco provides an update on the FASB/IASB Lease Accounting project with special regard to sale/leasebacks.
The FASB and the IASB have been at their Lease Accounting project since July 19, 2006. They have lease project fatigue and want to get this project done quickly – possibly too quickly to really get good feedback from the public on the final decisions being made.
They have issued two exposure drafts that received a total of 1,427 solicited comment letters and 40 unsolicited comment letters. The overwhelming majority of comment letters have been negative and the FASB has responded appropriately by reverting to existing GAAP for lessors and to maintain most of existing GAAP for lessees, except for the one major change to require operating leases to be capitalized. They have maintained a risks and rewards basis for classifying leases as either capital or operating. They have maintained the straight line average rent expense as the periodic cost for operating leases, and they classify the operating lease liability as a non-debt “other” liability.
FASB and IASB have decided not to re-expose the current project decisions for public comment using the basis that they have not made major changes to existing GAAP other than capitalizing operating leases by lessees. But since the last exposure draft, the issue of sale/leasebacks with non-bargain fixed price purchase options has arisen. The issue is that the already-issued Revenue Recognition standard (Rev Rec) does not use the same basis as the proposed Leases Standard for determining when a sale takes place, specifically when control of the asset is in the hands of the lessor or lessee in a sale/leaseback.
Rev Rec says that a sale has not taken place if the seller/lessee has a fixed price option to buy the asset, even if it is set at a non-bargain price. They think that Rev Rec “trumps” the Leases Standard. Since many equipment leases originate as sale/leasebacks and many have non-bargain purchase options, they will not be accounted for as sales and Type B/operating leases by both the lessee and lessor. This is a significant change to current lessee and lessor GAAP and should trigger re-exposing the lease project’s current decisions.
The good lessee accounting decisions regarding how a capitalized operating lease should be accounted for will be lost for a major segment of equipment leases. Based on the form at inception (straight lease or sale/leaseback) the accounting will be far different. Specifically the lessee will report “failed” sale/leasebacks as debt – not as a non-debt “other” liability as the FASB prescribes for non-sale leasebacks.
This sale/leaseback issue was not evident to the public until the Rev Rec standard was issued and when re-deliberations of the lease project began this year.
Per the FASB website:
“The FASB is committed to following an open, orderly process for setting standards. The FASB designed its comprehensive due process procedures, as more fully discussed below, to permit timely, thorough, and open study of financial accounting and reporting issues and to encourage broad public participation in the standards-setting process by creating channels for the communication of all points of view and expressions of opinion at all stages of the process. The cooperation of all concerned with or affected by financial accounting and reporting is fundamental to the operation of the FASB. Of particular importance to the FASB is the receipt of thoughtful, reasoned, and timely input during the FASB’s research, discussion, and deliberative processes. The FASB recognizes that acceptance of its conclusions is enhanced by demonstrating that the comments received in due process are considered carefully.”
What do you think: Is it important that the FASB stick to their rules and procedures and allow the public to comment on the significant changes to sale/leaseback accounting that were generally unknown until this year?