Friday, June 25, 2010

Leases in business acquisitions

Under FAS 13, if a business acquires another business that has capital leases, the lease is re-evaluated. The present value of the rents is the new obligation, while the asset is booked at fair value, which may be a different amount.

The FASB has decided, in a June 23 meeting, that this will no longer be the case. Instead, under the new lease accounting standard, an acquirer will account for the lease as if it were a new lease starting on the day of acquisition, and otherwise account for it as any other lease.

A rare win for simplification as part of the lease accounting revision...

Derecognition over performance obligation (sometimes)

The FASB & IASB, in meetings June 16 & 17, decided to partially pull back from the concept of a performance obligation for lessors in the new lease accounting standard. They have now decided to use that approach (where the original leased assets remains on the lessor's books untouched, and a matching receivable debit and performance obligation credit are set up for the lessor lease, with the receivable amortized using the interest method and the performance obligation amortized straight-line) only for leases "that expose the lessor to significant risks and benefits associated with the underlying asset." In other cases, a derecognition approach is to be used: Once the receivable is calculated for the lessor lease, the owned asset is credited for that amount. The IASB staff commented that this is similar to the current distinction between operating and capital leases (wasn't the goal of the new standard to get away from that?).

The vote was actually split between the boards, with the IASB in favor of this hybrid approach, while a majority of the FASB prefers performance obligations for all leases. However, the FASB Action Alert summary states that "the Boards" decided on the hybrid approach, which suggests that in the interests of convergence, either the IASB has priority or the vote is being tallied in total. I don't know enough about the workings of the convergence project to clarify that.

Other topics covered:

Lessor transition under a derecognition approach

The boards have decided that lessors should recognize a lease receivable at the present value of the remaining lease paymentss, and a residual asset at fair value. The present value is based on the implicit rate at lease inception, but it looks like that includes the residual asset at its current, not original, estimate of future value.

Leases with a service component, lessor derecognition

The boards were unable to come to a conclusion for how to account for leases that include a service component (what is called executory costs under the current leasing standards), when the services and leases are not distinct, for a lessor lease involving derecognition. This will be discussed further in July.

Purchase options

Purchase options are to be accounted for only upon exercise (aside from bargain purchase options, which immediately turn it into an in-substance purchase). This applies to both lessees and lessors.

Retirement of IASB members

Gilbert Gelard, Robert Garnett, and James Leisenring are retiring from the IASB as of June 30. Jim Leisenring has been a particularly forceful voice on the board. He's a former member of the FASB as well, and does not hesitate to make his views known. The impact of the change in personnel remains to be seen.

Friday, June 18, 2010

EZ13 v3.0 released!

FCS is delighted to announce the release of v3.0 of EZ13, our lease accounting software for lessees and lessors. EZ13 has always provided complete FAS-13-compliant accounting for both operating and capital leases. Some of the significant new features include:

* Notice dates: EZ13 can remind you that rents are changing, leases are expiring, or events that you've entered are coming up. You specify how many days before and after the event you want to be notified. When you've dealt with the matter, you can turn off display of that item without deleting the event.
* Multiple contingent rent types: You can now track up to 7 different types of contingent rent, each with their own account numbers for G/L entry. Two types are user-defined, so you can give them the meaning most relevant to your business.

* Purge leases: You may remove from a database leases that have terminated as of a date you specify. Optionally, these leases can be copied to another database.
* Copy leases to new database: You may copy any number of leases to a new database. This can be useful for testing changes to a lease without affecting your production database.

There are a number of other, less significant features, enhancing flexibility and usability. And of course, bug fixes.

More details about the full range of features EZ13 offers are available at

You can download a trial of EZ13 v3.0, either lessee or lessor version, at If you have any questions about how EZ13 can solve your lease accounting needs, please contact me by email or (203) 652-1375.