Thursday, April 25, 2013

Revised exposure draft coming in May

On April 10, the FASB met for a final go/no-go decision on the revised exposure draft (RED) for the new lease accounting standard. The board members were asked, as part of the FASB's standard due process, whether they have concerns about financial reporting complexity in the draft. Three members consider the draft to have too much complexity, and favor various alternatives; four, however, favor going forward with the draft as it stands. Even some of the supporters mentioned reservations (Chair Leslie Seidman, for instance, would like a different point for drawing the dividing line between rental and financing lease types), so there is definitely potential for further changes to the standard based on the responses received during the upcoming exposure draft's 120-day comment period.

The RED will include the alternative views, inviting respondents to comment both on the main proposal and on the alternatives (and, of course, anyone is free to offer their own suggestions as well). The staff announced that they expect the RED to be released in May, with the comment period then extending to September. We could then expect the boards to start discussing the comments possibly in October, but more likely in November (assuming the RED gets a similar number of comments to the original ED, and that most come in very close to the deadline, it'll take a few weeks for the comments to be reviewed and summarized).

Indications are that members of the IASB are not as reluctant to support the RED. Both boards have been making compromises for the sake of convergence (i.e., a common standard promulgated by both boards), but it remains to be seen how the dynamics of convergence, complexity, constituent pressure, consistency with the overall accounting framework and other standards, and the other matters that come into a vote will shape the final outcome.

A fundamental issue is that leasing serves different purposes for different companies (both lessees and lessors). On one extreme, a 4- or 5-year computer lease is clearly a purchase executed over time. On the other, a 12-month real estate lease uses only a negligible portion of the value of the underlying asset. To treat those as the same type of transaction seems inappropriate. But there are leases that fall at every point of the spectrum in between, and any dividing line will inevitably be either arbitrary or inconsistent. Individual reporting entities, as well as users of financial statements, are going to advocate for what works best for them, but the boards have to make a decision that works reasonably for all and that limits the potential for problems, particularly in the off-balance-sheet burying of material financial information which was the primary original impetus for the rewrite in the first place.

The timeline for implementation seems to be slipping again. Even if the boards don't make any significant changes between the RED and the final standard (which seems increasingly unlikely), it's doubtful they could finish before the end of this year. Given the complexity of the changes (the boards have been clear that they're going to allow plenty of time for implementation), and the need for a 2-year lookback for U.S. companies, it seems that 2016 is becoming infeasible as an implementation date, and 2017 is more likely. It's astonishing when you remember that the project was announced in July 2006. For one thing, it will mean that not a single FASB member who voted to start the project will be in office when it actually takes effect (since members serve a maximum of 10 years). In fact, I'm not sure that any of the board members at the announcement date will even vote on the final standard; Thomas Linsmeier joined the board right about that time, but he's the only one (other than Leslie Seidman, whose second term expires this summer) going that far back.