As discussed in the series of PYA Alerts issued in 2009 and 2010, the Financial Accounting Standards Board (FASB) released its Proposed Accounting Standards Update (PASU) on Leases (Topic 840) on August 17, 2010. The proposed standard would have, in essence, eliminated the concept of an operating lease and required recognition of all leases on the balance sheet while also making the process of measuring and re-measuring lease related assets and liabilities more complex and potentially introducing volatility to the income statement. These proposed changes in accounting treatment could potentially impact an organization’s financing strategies, borrowing capacity and ability to obtain financing and their ability to meet certain debt covenants.
At the most recent joint meeting between the FASB and the International Accounting Standards Board (IASB) held in February 2011, due to concerns expressed by stakeholders during the PASU’s comment period, the Boards have tentatively agreed to consider a structure whereby there would still be two classifications of leases.
The two classifications that the boards are considering are “finance leases”, the profit and loss recognition pattern of which would be consistent with the proposals set forth in the PASU, and “other-than-finance leases”, the profit and loss recognition pattern of which would be consistent with the current accounting for operating leases under generally accepted accounting principles in the U.S. The Boards tentatively decided to establish criteria to differentiate a “finance lease” from an “other-than-finance” lease and will use these tentative criteria to reach out to stakeholders and determine if concerns over the accounting treatment in the PASU would be addressed.
The Boards also tentatively modified the PASU on how renewal options and variable lease payments should be accounted for in relation to the initial measurement of the liability/receivable recognized on the balance sheet. Such modifications may impact the lease term, the amounts of lease payments and the timing of reassessments of the lease terms.
The Boards intend to carefully consider all feedback, re-deliberate significant issues, and issue a final leases standard in 2011. To view the most recent lease project update, click here.
The professionals at PYA and affiliate, Realty Trust Group, understand the financial and operational importance of leases and are ready to discuss this and other matters related to accounting for leases with you. Please contact PYA at 800.270.9629, and stay tuned for future Alerts regarding these matters.
