Thursday, May 24, 2012

Today's board meeting: Setting the stage

This morning the FASB and IASB held a joint meeting at the FASB offices in Norwalk (part of a series of joint meetings all week long). The first item on today's agenda was a review of the outreach done on expense recognition options for the new lease accounting standard. As reported in my prior blog entry, the staff (and board members) held a number of outreach events with financial statement preparers, users, and auditors, and summarized the results in a paper available online.

Board members discussed their reactions to the responses received. They heard a strong plea for simplicity from the various constituents. Essentially all board members agreed that Approaches B & C were not practicable, even though several of them expressed that they felt one or the other was conceptually the best choice. That leaves Approach A (capital/finance lease accounting), Approach D (straight-line expense recognition), or a combination of the two, with the need to define some dividing line between them. (And, as one board member noted, there is a third model that they've already agreed to: operating lease accounting, off balance sheet, for leases of 12 months or less.)

In the discussion, calculation of the balance sheet with Approach D was clarified:  I'm going to make another post that looks at the calculations under Approach D a bit more. In essence, it's a plugged number, though the staff person didn't like the use of that word. But some board members are concerned about the conceptual basis for the calculation, considering that it doesn't fit the normal definition of amortization and depreciation. They want lease accounting to be consistent with the overall Conceptual Framework of accounting that they've been working on for years.

They noted that in outreach, real estate lessees almost unanimously preferred Approach D. Equipment lessees generally preferred Approach A. However, there are many permutations on leasing, and board members noted that it won't be possible to make the accounting fit every different motivation that management has for entering into a lease.

Some board members would prefer symmetry between lessee and lessor accounting, in part because it seems easier to defend conceptually. Others noted that lessor accounting is generally not considered broken, and that leasing of investment property is already being scoped out of the project, so they were less concerned about symmetry.

While IASB Chairman Hans Hoogervorst noted that some European standard-setters don't agree with putting leases on the balance sheet, he noted that support for that move was almost universal among the preparers and especially users of financial statements. It seems clear that that decision will not be revisited.

The boards plan to vote in June on the expense recognition profile. The staffs were directed to present as options Approach A, Approach D, and a combination, with several alternatives for how to draw the line between A & D (similar to current IAS 17; real estate vs. equipment; and others). The staff stated that they expect to have a few wrap-up questions to deal with at the July meeting, and they would then prepare the Revised Exposure Draft.


  1. I was wondering if you could briefly clarify a few things regarding accounting for lease payments tied to an index. If a company's lease payments are tied to the CPI and the previous years rate of inflation was 2%, are they supposed to include this 2% increase in their calculation of minimum lease payments? Or are they supposed to assume the current index across future lease payments (i.e. no inflation)? I'm curious about what current regulations stipulate and what it looks like is in store for the future. Thanks!

  2. Under FAS 13 (the current standard), you use the current index, which means no inflation changes are considered part of the minimum lease payments; everything is contingent rent. The proposed new standard calls for initial measurement based on no inflation, then recalculating the remaining rent for the lease each time the rents change due to application of the CPI adjustment (as noted in Both the asset and the liability would be adjusted (though any change taking effect in the current reporting period would be expensed).