Wednesday, April 1, 2009

Scope of new standard

This is the first in a series of blog postings I’ll make regarding the lease accounting revision discussion paper released by the FASB and IASB on March 19. I’ll go basically chapter by chapter through the DP reviewing the issues. (FWIW, I'm looking at the FASB's edition of the DP.)

The first question that needs to be asked in the new lease accounting standard is: What transactions does it cover? There is a difference in scope between FAS 13 and IAS 17, the current standards of the FASB and IASB, respectively. FAS 13 applies to arrangements that convey a right to use property, plant, and equipment, while IAS 17 more expansively applies to rights to use an asset, including intangible assets.

Some people have suggested rebuilding the definition of a lease from the ground up. The boards have tentatively decided not to, and to base the scope on the existing standards’ scope.

The DP notes that some people would like the standard to exclude “non-core assets” and “short-term leases.” However, each of these suggestions raises serious problems. The first is again, how to define each term. What one company thinks of as non-core, another similar company may consider core, thus reducing comparability (which is one of the key reasons for the new standard). And “non-core assets” may still amount to significant assets and liabilities, which are relevant for review of financial statements no matter what their use. “Short-term leases” are typically defined as those of less than a year in length, but the boards are concerned that large numbers of short-term leases could still total up to material amounts. And the experience of the past 30 years suggests that a short-term safe harbor would result in lease structuring to evade reporting under the new regime. Both issues are still undecided, however, with not even a preliminary decision reached.

The DP notes that as with all standards, immaterial items can be excluded.

Respondents to the DP are asked whether they agree with the proposed scope. If they think non-core assets or short-term leases should be excluded, how should those be defined?

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