FASB Sounds Retreat on New Accounting Standards for Leases


Last year we reported in advisories directed to our health care (see advisory) and real estate (see advisory) readers that the Financial Accounting Standards Board (FASB) is considering new accounting rules for real estate and equipment leases, new rules that would dramatically change the way in which leases are reported in financial statements of public and private companies and nonprofit organizations. The proposed rules were published in an Exposure Draft (Topic 840-Leases) released by the FASB in August 2010.

It now appears that the FASB may be ready to reverse course, and perhaps even to adhere to its current rules, which draw a bright line between capital and operating leases. We believe that those who have been preparing for the new rules may want to hold tight until the FASB’s direction becomes more certain.

In a nutshell, the new rules would discard the fundamental distinction in today’s generally accepted accounting principles (GAAP) between an operating lease and a capital lease. The premise of the new rules is that all leases—no matter the duration or economic terms—should give rise to an asset, and a liability, on the balance sheet of both the lessor and the lessee. These new accounting standards would create real challenges for lessees, since a lessee is required to value the future liability created by a lease using a complex “expected outcome analysis.”

There would also be more complexity for lessors under these standards, since each lessor must chose between two alternative methods of financial recording for the lease—a choice that depends on whether the lessor will continue to have “significant exposure” to the rights and benefits of the leased asset during and after the expiration of the lease.

Please see full article below for more information.

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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