Thursday, February 14, 2013

More decisions, more delays

The slow march to a new lease accounting standard has been drawn out yet again. On January 29 & 30, the FASB and IASB met to discuss issues that had arisen during the drafting process for the Revised Exposure Draft (RED). Details of those issues are below, but the most important news out of the meeting is that the staff announced that the exposure draft is "planned for publication in the second quarter of 2013." Up to now, the (most recent) plan had been to release it during Q1. I'm not aware of reasons for the further delay.

At this point, it seems unlikely that a new standard will be released before the end of the year, given the time required for the next steps of the process (4 months for comment period, a month to compile the comments, time for the boards to review the comments and decide to make any changes, then time to draft the final standard and release it). And that's even if they don't make major changes; with several influential bodies expressing reservations about aspects of the RED, that's by no means assured.

Decisions at the Jan. 29-30, 2013 meeting

A lease sometimes includes multiple types of assets. Building leases, for instance, inherently include land (perhaps just the land the building is on, but often a larger area, some of which might be used as a parking lot). A factory might be leased with associated equipment (beyond just the equipment inherent in a building, like HVAC, elevators, etc.). Since the RED proposes to classify leases with a substantial part of the determination based on the type of underlying asset, how should the type of asset be determined in these cases? When should the lease be broken up into multiple pieces, accounted for separately?

The boards agreed with the staff proposal to use the same methodology as is in the draft Revenue Recognition standard (currently also working through the deliberative process), that components would be separated if they can be used independently (either as is or using other resources that are readily available). For instance, a building with land for a parking lot would be a single lease, while a lease that includes a second plot of land that could be developed separately would be separated into two components. Another example the staff presented is a manufacturing plant with two large pieces of manufacturing equipment installed, equipment that is available separately (perhaps from other suppliers), which would be considered three lease components, each to be accounted for separately.

If a lease contains both property and non-property elements, the decision of whether to treat the lease as property or not for purposes of applying the classification tests should be based on the "primary asset." An example given is an oil storage tank, which is considered equipment. The lease includes the land the tank is on, but the tank is the purpose of the lease, and the land is simply necessary to hold the tank. The lease would be classified according to non-property rules.

Current accounting separates buildings and land when the building is capital; the land is always operating (unless the lease contains an ownership transfer or bargain purchase option). The boards decided that there is no need to separate them in the new standard.

The staff introduced a new set of terms for the different types of leases. "Type 1" leases are those to be handled like current capital (finance) leases, with a front-loaded expense profile (interest expense is higher in the early months of the lease, while depreciation is recognized straight-line). "Type 2" leases are those that will use the single lease expense methodology (primarily those that are operating leases under the current standards). It's not clear whether this terminology will become official, or is simply a temporary placeholder.

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