Posts Tagged ‘IASB’
|5 things every corporation should do to prepare for the upcoming lease accounting changes
Wednesday, January 25th, 2012
By Brant Bryan, Principal
In the near future the FASB and the IASB will jointly issue new guidelines for lease accounting. These new standards are substantially different from the current standards and will affect every corporation that issues public financial statements.
In the new standards all leases will be reflected as both an asset and a liability, thus “inflating” the size of corporate balance sheets. During the lease term, the asset and the liability will be expensed, but in different patterns than under current standards.
The new standards will likely become effective in about 2 years. What should corporations be doing now to prepare for this sea-change of lease accounting?
1) Update your lease database. The new accounting standards will require corporations to assign a value to every lease transaction. The value will be based on more information than most corporations now include in their lease database.
2) When entering into new leases evaluate them using both the current lease accounting implications and the new standards. All leases will be included in the new standards. There will be no “grandfathering”. Therefore, you need to know what impact each lease will have on your financial statements in both 2012 and in future years.
3) Examine the effect of lease length on your financial statements. Longer term leases will normally cause a greater increase in the size of the lease asset and liability. How will increased balance sheet size impact your performance ratios and metrics? Begin to establish a philosophy of what your company wants.
4) Talk with bankers, real estate consultants and rating agencies about how the changes will impact your credit capacity, rating and borrowing cost. Leased assets will be a separate category on the balance sheet and effectively is a source of financing for lessees. Most companies believe it should be “business as usual”, but understand what it means for you and your borrowing costs.
5) Look again at the options in your leases and how you structure those options. More than ever, lease options will be important. Some rent streams may shift onto or off of your balance sheet, depending on your objectives and the facts and circumstances. Also, the new standards may cause you to prefer your options to be structured differently than you have done so previously.
Tags: corporate real estate, FASB, IASB, lease accounting, lease structuring
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Changes in Lease Accounting Simplified
Wednesday, March 16th, 2011
By Brant Bryan, Principal
The Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB) tentatively agreed to revise some of the proposed lease accounting standards. Nearly 800 letters and comments had been sent to the Boards in response to the proposed changes, and as a result, the Boards are simplifying portions of the new lease standards. However, the Boards remain firmly committed to requiring that all leases be recognized on the balance sheet.
What Has Changed?
The tentative changes from the initial Exposure Draft that will have the biggest impact to corporate tenants are:
-Defining Lease Term as the base term plus only option periods for which there is significant economic incentive to extend.
-Leases with variable lease payments (such as percentage or contingent rent) will have a threshold for inclusion in lessee’s lease liability and asset.
-Creating two classifications of leases: (1) Finance Leases and (2) Other-Than-Finance Leases.
-Affirming the direction of the Exposure Draft to require all leases to be reflected on the balance sheet as both an asset and a liability.
What Are the Specifics of the Changes?
In a significant change from the Exposure Draft, the Boards decided that all lease terms will be the contractual minimum period plus any optional renewal periods for which an exercise of the renewal option is reasonably certain. Reasonable certainty will be based solely on economic factors within the lease, such as bargain pricing on renewals. The Board plans to provide specific criteria to be used in this assessment. These tests likely will be very similar to the current GAAP standard concerning renewals. The ED had proposed including renewal terms if they were more-likely-than-not to occur based on a wide variety of factors, including lessee past practice, market conditions, and lessee intent.
One change that will greatly simplify life for corporate lessees is that there will be fewer reassessments of renewal options during the lease term than the Exposure Draft had proposed. Reassessments will only need to occur when economic factors affecting the decision to extend or terminate a lease change significantly. Lessees will not need to search for reassessment events.
The Boards also decided that variable lease payments tied to an index or rate would be included in lease calculations using the current rate, or spot market, for that index or rate, rather than a forward projection. There will also be thresholds for including contingent rents in leases (such as percentage of sales). Such contingent payments will only be included when they are virtually certain. If variable payments are, in substance, minimum lease payments, they shall be included based on such minimum.
There were also discussions regarding several other issues, including: which agreements shall be defined as a Lease, Residual Value Guarantees, and Lessor Accounting.
Two Types of Leases:
In another significant change from the Exposure Draft, the Boards tentatively decided there will be two classifications for leases, and each type will have a different pattern of recognition in an income statement. All leases will either be a (1) Finance lease or (2) Other-Than-Finance Lease. The Boards will develop criteria for distinguishing between these two types of leases.
A finance lease will be viewed as a financing transaction. The pattern of income for a finance lease will be consistent with the methodology presented in the Exposure Draft as it will be treated as a financing, with more expense early in the lease term. If the lease is similar to a rental transaction and financing is not considered to be a significant part of the transaction, the lease will be treated as an Other-Than-Finance Lease. The pattern of income for an Other-Than-Finance Lease will be consistent with current US GAAP (straight lined or leveled).
What Is Next?
Deliberations will continue, and other changes may be forthcoming before a final lease accounting standard is issued. June 30, 2011 is still the target date for finalizing the new standards. The exact schedule for formal adoption of the new standards has not been set; however, most observers expect larger corporations to begin reporting under the new standards with their 2012 fiscal year-end.
Tags: corporate real estate, Exposure Draft, FASB, IASB, lease, lease accounting
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