Posted on 05/12/2014

By Chris Smart, Product Manager
The final adoption of FASB and IASB’s lease accounting proposal is coming. Is your company ready?

The final decision may make a big difference for your company, with possible implications including a bigger compliance burden and a material change on corporate financial statements, potentially bringing billions of dollars on corporate balance sheets, modifying financial ratios, and impacting debt covenants.

With the currently proposed lease accounting changes, leases will be recognized as a Right-of-Use Asset (ROU Asset), and nearly all leases will be recorded on the Balance Sheet. Operating and Capital leases will be classified as Type A (mostly assets) or Type B (mostly property leases). Classification of the lease will look at how much of the underlying asset was consumed during the lease term. The classification will determine the method for recognizing lease revenue and expense. For lessees, the recognition of lease-related assets and liabilities, as well as changes to the timing of lease expense recognition, could have significant financial reporting and business implications.

During the March 2014 sessions, FASB and IASB were unable to come to an agreement on what accounting method would be applied to lessees. FASB members were in support of the dual recognition approach as outlined in the May 2013 Exposure Draft. Under this approach, the majority of existing capital leases would be recognized as a Type A lease while the majority of operating leases would be recognized as a Type B lease. The IASB has continued to put the majority of their support behind a single approach in which all leases would be accounted for as the purchase of a ROU asset on a financed basis. The boards will meet again in May and June of 2014 so stay tuned!

Prepare for the Future

No matter what the boards decide, it’s important to understand now what your current lease terms are and how they might be affected. Not only will the new standards apply to future leases, but they will also be applied to those existing at the time of the change.

Here are some suggestions we have to help your organization get ready for the change:

For current leases:

  • Know if your leases will be affected
  • Know how your leases are currently categorized
  • Know the lease start date and which options you have a significant economic incentive either to extend or terminate
  • Know your discount rate for calculating Net Present Value (NPV)
  • Know your future payment obligations
  • Know your past payment history
  • Keep track of modifications that happen between now and the commencement date: term length, payment amount, index or rate, impairments, and lease hold improvements

For future leases:

  • Know the lease term
  • Know what category the lease falls into
  • Know if you lease contract contains multiple assets
  • Know your discount rate for calculating NPV
  • Know your future payment obligations
  • Know the amount of initial direct costs and incentives
  • Keep track of modifications that happen between now and the commencement date: Term length, payment amount, index or rate, impairments, and lease hold improvements

Click here for more information on the proposed lease accounting standards, including what's different from the current lease accounting standards and what you can do to prepare.


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