When the FASB & IASB decided to revise the lease accounting standard back in 2006, they called for members of academia, public accounting, and the world of publicly held companies to volunteer to serve on an advisory panel, called the Leases Working Group. A first meeting was held in January 2007 to discuss the various issues surrounding lease accounting, and get the group's input on possible approaches to deal with the problems.
Then the boards seemed to forget the group existed. It has been over 2-1/2 years since the group met. Finally, on September 3, a second meeting of the Leases Working Group will be held in London. It's planned as an all-day event. Unlike IASB board meetings, this meeting will apparently not be available for live online listening; however, they have promised that audio will be available at a later time. Anyone who wants to attend the meetings live may do so, but needs to register in advance on the IASB website.
Agenda papers for the meeting are also available at the IASB website. They indicate that the issues to be discussed are largely issues that were not covered by the Preliminary Views discussion paper, though there will be a brief review of the 295 comment letters received. Instead, the topics to be discussed are mostly matters that the boards have discussed in their May, June, and July meetings: impairment, revaluation, initial direct costs, sale & leaseback transactions, transition, and lessor accounting, plus in-substance purchases, which some members feel should be accounted for differently than other leases. That has been mentioned at prior meetings, but there has been no in-depth discussion on the topic. Many of the topics for review are ones where the two boards have taken different positions; a number of comment letters urged the boards to come to an agreement on these topics (many respondents felt a unified standard was more important than which position was taken). More detailed information on the topics is available at the IASB's web site, among the agenda papers for prior board meetings (the appropriate papers are noted on p. 3 of the working group's agenda paper #1).
The working group will have to move at a fast pace; less than half an hour per issue has been allotted for the lessee topics, plus 90 minutes for lessor accounting and 45 minutes for in-substance purchases.
The boards plan to discuss the comment letters at meetings in September, and lessor accounting at October meetings. At this point, the schedule for the leases project still indicates an exposure draft in the second half of 2010, and a final standard in the first half of 2011. Whether the boards will stick with that after the September and October meetings, in the face of substantial public pressure for a simultaneous release of new lessee and lessor standards and a large amount of work to do on both sides of the transaction, remains to be seen.
Thursday, August 27, 2009
Thursday, July 30, 2009
Comment letters update, lessor accounting
The IASB continues to post comment letters to its web site. As I write this, the count stands at 272, with a notation that "Comment Letters are currently being uploaded to the website." However, fewer than 10 letters have been posted this week. It looks like these are letters received after the deadline, which they are choosing to still include (some of the cover letters have dates after July 17).
At a joint FASB/IASB meeting on July 23, the boards announced that they would review the comment letters at a meeting in September.
At the same meeting, the boards reached the following tentative decisions on lessor accounting (reported in the FASB Action Alert):
1. Initial measurement of the lessor’s right to receive rental payments would follow existing literature for the accounting for financial assets under either IFRSs or U.S. GAAP (IAS 39, Financial Instruments: Recognition and Measurement, for IFRSs and Section 310-10-30 of the FASB Accounting Standards Codification™ for U.S. GAAP).
2. Initial measurement of the lessor’s right to receive rental payments under U.S. GAAP would be discounted using the interest rate implicit in the lease.
3. Initial measurement of the lessor’s performance obligation would equal the customer consideration received (that is, on initial measurement the performance obligation would equal the lessor’s receivable).
4. Subsequent measurement of the lessor’s performance obligation would reflect decreases in the entity’s obligation to permit the lessee to use the leased item over the lease term.
However, they note that all of these decisions presuppose maintaining the overall concept of setting up a performance obligation for lessors (the original asset remains on the books, and a receivable is added to assets with a matching performance obligation as a liability). A number of comment letters have criticized that decision, in part because it seems not to mirror lessee accounting, and the boards have instructed their staffs to do additional analysis of a different model that would derecognize the asset to the extent of the lease. (This was the staff's preference presented to the boards at their May meetings, as previously mentioned on this blog.)
At a joint FASB/IASB meeting on July 23, the boards announced that they would review the comment letters at a meeting in September.
At the same meeting, the boards reached the following tentative decisions on lessor accounting (reported in the FASB Action Alert):
1. Initial measurement of the lessor’s right to receive rental payments would follow existing literature for the accounting for financial assets under either IFRSs or U.S. GAAP (IAS 39, Financial Instruments: Recognition and Measurement, for IFRSs and Section 310-10-30 of the FASB Accounting Standards Codification™ for U.S. GAAP).
2. Initial measurement of the lessor’s right to receive rental payments under U.S. GAAP would be discounted using the interest rate implicit in the lease.
3. Initial measurement of the lessor’s performance obligation would equal the customer consideration received (that is, on initial measurement the performance obligation would equal the lessor’s receivable).
4. Subsequent measurement of the lessor’s performance obligation would reflect decreases in the entity’s obligation to permit the lessee to use the leased item over the lease term.
However, they note that all of these decisions presuppose maintaining the overall concept of setting up a performance obligation for lessors (the original asset remains on the books, and a receivable is added to assets with a matching performance obligation as a liability). A number of comment letters have criticized that decision, in part because it seems not to mirror lessee accounting, and the boards have instructed their staffs to do additional analysis of a different model that would derecognize the asset to the extent of the lease. (This was the staff's preference presented to the boards at their May meetings, as previously mentioned on this blog.)
Friday, July 24, 2009
DP comment letters
The comment period has now closed for the discussion paper, Leases: Preliminary Views, released by the FASB & IASB in March. A flood of comment letters came in close to last Friday's deadline; as of this posting, the comment letters page lists over 200 comment letters received, with a notation that additional letters have yet to be posted.
Letters have been received from almost every conceivable type of party: accounting firms, accounting boards, lessees, lessors, associations of lessees and lessors, accounting academics, and even a few individuals. (FCS's comment letter is available here.) Interestingly, even though a major reason for the proposed revision is to provide better information to users of financial statements (i.e., investors and lenders), I see only a couple of comment letters from such entities, so we have little basis to know whether they feel the changes would help them make better investing decisions. We only have the claims of other interested parties that this or that change would or wouldn't be useful to statement users.
While I haven't had time to read all the comment letters, most of them fall in predictable ways. Accountants generally favor the overall approach, though they may have issues with some of the details. Most lessors and many lessees don't like the elimination of operating leases; many are also concerned about the increased complexity, particularly if reassessment every reporting period is required. (Some comment that lessees made their decisions to lease based on the current rules, and requiring capitalization of existing operating leases messes up their capital structures.) Some lessees are more sanguine about the general approach; JCPenney, for instance, says that it has long been internally managing its capital structure as if real estate operating leases were capitalized, so making that change on the external books is no big deal, and makes a lot of sense to them (though they'd still like to exclude small leases).
Several letters (such as the Office of Advocacy of the U.S. Small Business Administration) express concern about the impact on small businesses leasing items like computers and copiers; the impact on their financial statements, the complexity involved in calculating and amortizing present valued obligations, and the hassles of reconciling differing treatment between book and tax accounting were mentioned as issues. A number of letters suggest that small or short-term leases should be excluded to reduce the reporting burden, considering that the impact would generally be immaterial; other letters (particularly from accounting firms) oppose any exclusions, concerned that it opens the door to evasive manuvers.
Overall, it seems like virtually every question has respondents on both sides of the issue, often with very carefully thought-out reasons. Still, it's not hard to see the "whose ox is being gored" aspect of many of the comments: lessors are concerned that if all leases are capital, many companies will buy instead of lease as the off-balance-sheet benefit disappears (even as they claim that that's rarely why lessees take leases); lessees with lots of operating leases are concerned about the effect on their balance sheet of capitalizing those leases; some academics and accountants seem to be pursuing theoretical accuracy with no concern for the practical costs (while others are very aware of their clients' pain).
There are, however, some areas of general agreement. Virtually no one likes the idea of recalculating the obligation to reflect changes in a lessee's incremental borrowing rate, considering that it adds complexity and doesn't reflect a change in the actual economics of the lease. Very few like the idea of revaluing the obligation at fair value, for similar reasons. Recognizing options and contingent rent based on the most likely amount rather than probability weighting is strongly favored (though many don't want to recognize options until actually exercised or reasonably assured, or contingent rent until incurred, both of which are the current rules). Respondents generally agree with treating residual guarantees similarly to contingent rents.
There is a great deal of concern with complexity and cost, particularly the requirement to reassess at each reporting period (especially with regard to contingent rents). Many respondents suggest that contingent rents should only be capitalized if the regular rents are clearly below-market (otherwise, they would be expensed as incurred, as under current rules). Some accountants, though, believe reassessment is desirable to more accurately portray the current state of the leases. Another area of complexity mentioned by a number of American respondents is book/tax differences which would be generated by treating current operating leases as capital (when they would still be operating or "true leases" for tax purposes).
A large number of letters call for lessor lease accounting to be included in the revision, wanting to make sure that lessee and lessor accounting continue to mirror each other, rather than operate under different standards. Some are concerned, though, that the boards may rush their lessor accounting review to stay on the current lessee schedule.
CFO magazine has an article about the comment letters on their website.
Letters have been received from almost every conceivable type of party: accounting firms, accounting boards, lessees, lessors, associations of lessees and lessors, accounting academics, and even a few individuals. (FCS's comment letter is available here.) Interestingly, even though a major reason for the proposed revision is to provide better information to users of financial statements (i.e., investors and lenders), I see only a couple of comment letters from such entities, so we have little basis to know whether they feel the changes would help them make better investing decisions. We only have the claims of other interested parties that this or that change would or wouldn't be useful to statement users.
While I haven't had time to read all the comment letters, most of them fall in predictable ways. Accountants generally favor the overall approach, though they may have issues with some of the details. Most lessors and many lessees don't like the elimination of operating leases; many are also concerned about the increased complexity, particularly if reassessment every reporting period is required. (Some comment that lessees made their decisions to lease based on the current rules, and requiring capitalization of existing operating leases messes up their capital structures.) Some lessees are more sanguine about the general approach; JCPenney, for instance, says that it has long been internally managing its capital structure as if real estate operating leases were capitalized, so making that change on the external books is no big deal, and makes a lot of sense to them (though they'd still like to exclude small leases).
Several letters (such as the Office of Advocacy of the U.S. Small Business Administration) express concern about the impact on small businesses leasing items like computers and copiers; the impact on their financial statements, the complexity involved in calculating and amortizing present valued obligations, and the hassles of reconciling differing treatment between book and tax accounting were mentioned as issues. A number of letters suggest that small or short-term leases should be excluded to reduce the reporting burden, considering that the impact would generally be immaterial; other letters (particularly from accounting firms) oppose any exclusions, concerned that it opens the door to evasive manuvers.
Overall, it seems like virtually every question has respondents on both sides of the issue, often with very carefully thought-out reasons. Still, it's not hard to see the "whose ox is being gored" aspect of many of the comments: lessors are concerned that if all leases are capital, many companies will buy instead of lease as the off-balance-sheet benefit disappears (even as they claim that that's rarely why lessees take leases); lessees with lots of operating leases are concerned about the effect on their balance sheet of capitalizing those leases; some academics and accountants seem to be pursuing theoretical accuracy with no concern for the practical costs (while others are very aware of their clients' pain).
There are, however, some areas of general agreement. Virtually no one likes the idea of recalculating the obligation to reflect changes in a lessee's incremental borrowing rate, considering that it adds complexity and doesn't reflect a change in the actual economics of the lease. Very few like the idea of revaluing the obligation at fair value, for similar reasons. Recognizing options and contingent rent based on the most likely amount rather than probability weighting is strongly favored (though many don't want to recognize options until actually exercised or reasonably assured, or contingent rent until incurred, both of which are the current rules). Respondents generally agree with treating residual guarantees similarly to contingent rents.
There is a great deal of concern with complexity and cost, particularly the requirement to reassess at each reporting period (especially with regard to contingent rents). Many respondents suggest that contingent rents should only be capitalized if the regular rents are clearly below-market (otherwise, they would be expensed as incurred, as under current rules). Some accountants, though, believe reassessment is desirable to more accurately portray the current state of the leases. Another area of complexity mentioned by a number of American respondents is book/tax differences which would be generated by treating current operating leases as capital (when they would still be operating or "true leases" for tax purposes).
A large number of letters call for lessor lease accounting to be included in the revision, wanting to make sure that lessee and lessor accounting continue to mirror each other, rather than operate under different standards. Some are concerned, though, that the boards may rush their lessor accounting review to stay on the current lessee schedule.
CFO magazine has an article about the comment letters on their website.
Thursday, July 23, 2009
EZ13 v2.3 released
FCS is delighted to announce the release of version 2.3 of EZ13(TM), the Lease Accounting solution. (The new version was actually released over a month ago, but I forgot to post this announcement.) This latest release includes a wide range of new features:
Contingent rent: EZ13 has a new tab for contingent rent, which is rent paid that is not part of the FAS 13 minimum lease payments. Contingent rent is expensed as incurred. You can enter contingent rent in the screen tab, or upload it using an Excel® spreadsheet (requires Excel installed on your computer). (Not in Mini Edition.)
Rent escalation: EZ13 can automatically create a series of rent steps based on a periodic escalation calculation (increasing by 10% every 5 years, or 5% compounded per year, etc.). This complements the existing automatic calculation of rent for leases with level principal amortization.
Expirations report: Get a list of leases scheduled to expire between two dates.
Transfer additions and terminations: A transfer addition picks up the asset and obligation midstream for the lease; a transfer termination is almost the same as an early termination, but is designed to match a transfer addition. These are useful if a lease is being moved from one department to another, and you want to recognize the expenses up to a certain date as belonging to one account and afterwards to another (using EZ13’s account numbers feature or other distinguishing codes).
Month to month extensions: Sometimes leases are renewed after expiration on a month to month basis. There is no future rent commitment; rent is expensed as incurred (using the contingent rent feature noted above). You can optionally leave the gross asset and accumulated depreciation on the books (assuming the lease is depreciated over the lease term, the gross asset and accumulated depreciation are equal, so the net asset is zero).
Capitalize leases at incremental borrowing rate (not in Lite or Mini Editions): EZ13 has had the capability to treat operating leases as capital, using their incremental borrowing rate as the capital rate. This is intended both for current indenture reporting that some lenders require, and in anticipation of the upcoming rewrite of the lease accounting standard, which plans to capitalize all operating leases at the incremental rate. The current draft of the upcoming standard calls for all leases, including those currently capital, to use the incremental rate; there would be no limitation of the asset value to the fair market value of the underlying asset, which currently causes some capital leases to have higher interest rates. This new option lets you see the effect on your capital leases of the FASB/IASB proposal. (See prior blog entries for more information on the FASB/IASB proposed rewrite of lease accounting standards.)
Some of the feature additions were in response to requests from users of EZ13. We will continue to provide updates (at least one per year) with enhanced features at no additional cost to clients who maintain a support contract. Updated CDs are being sent to all such clients. Any clients who have not maintained their support contract can get the update by reinstating support; contact us for details.
The free demo available for download on our website has been updated to v2.3, so you can try out the new features yourself.
Contingent rent: EZ13 has a new tab for contingent rent, which is rent paid that is not part of the FAS 13 minimum lease payments. Contingent rent is expensed as incurred. You can enter contingent rent in the screen tab, or upload it using an Excel® spreadsheet (requires Excel installed on your computer). (Not in Mini Edition.)
Rent escalation: EZ13 can automatically create a series of rent steps based on a periodic escalation calculation (increasing by 10% every 5 years, or 5% compounded per year, etc.). This complements the existing automatic calculation of rent for leases with level principal amortization.
Expirations report: Get a list of leases scheduled to expire between two dates.
Transfer additions and terminations: A transfer addition picks up the asset and obligation midstream for the lease; a transfer termination is almost the same as an early termination, but is designed to match a transfer addition. These are useful if a lease is being moved from one department to another, and you want to recognize the expenses up to a certain date as belonging to one account and afterwards to another (using EZ13’s account numbers feature or other distinguishing codes).
Month to month extensions: Sometimes leases are renewed after expiration on a month to month basis. There is no future rent commitment; rent is expensed as incurred (using the contingent rent feature noted above). You can optionally leave the gross asset and accumulated depreciation on the books (assuming the lease is depreciated over the lease term, the gross asset and accumulated depreciation are equal, so the net asset is zero).
Capitalize leases at incremental borrowing rate (not in Lite or Mini Editions): EZ13 has had the capability to treat operating leases as capital, using their incremental borrowing rate as the capital rate. This is intended both for current indenture reporting that some lenders require, and in anticipation of the upcoming rewrite of the lease accounting standard, which plans to capitalize all operating leases at the incremental rate. The current draft of the upcoming standard calls for all leases, including those currently capital, to use the incremental rate; there would be no limitation of the asset value to the fair market value of the underlying asset, which currently causes some capital leases to have higher interest rates. This new option lets you see the effect on your capital leases of the FASB/IASB proposal. (See prior blog entries for more information on the FASB/IASB proposed rewrite of lease accounting standards.)
Some of the feature additions were in response to requests from users of EZ13. We will continue to provide updates (at least one per year) with enhanced features at no additional cost to clients who maintain a support contract. Updated CDs are being sent to all such clients. Any clients who have not maintained their support contract can get the update by reinstating support; contact us for details.
The free demo available for download on our website has been updated to v2.3, so you can try out the new features yourself.
Wednesday, July 8, 2009
Additional decisions on lessee accounting
At meetings held June 17 and June 18, the FASB and IASB (respectively) discussed additional lease accounting issues that were not covered in the Preliminary Views discussion paper. The following topics were discussed and conclusions reached:
Sale and leaseback transactions
An asset (most commonly real estate) may be sold and immediately leased back. FAS 98 has an extensive set of tests to determine whether the continuing involvement of both seller/lessee and buyer/lessor are such that the transaction should be recognized as a sale and a lease, or as a financing that doesn’t meaningfully transfer the asset, so that it would remain on the books of the putative seller/lessee. Sale/leasebacks are sometimes done for cash flow purposes; at other times, a major purpose under current accounting may be off-balance sheet financing. With the end of operating lease accounting under the new rules, the latter purpose would disappear.
The boards decided that in a sale/leaseback, the entire asset should be derecognized and replaced with a right-to-use asset (rather than keeping a portion of the original asset on the seller/lessee’s books). The IASB concluded that a gain should be recognized immediately; the FASB’s meeting summary doesn’t indicate their decision. The FASB thinks there may be a need for additional guidance when the sale price or rental payments aren’t at market rates.
Impairments
Existing general accounting standards for impairments should also be used for lease right-to-use assets. This means that US lessees would use FAS 144, while IFRS users would use IAS 36, consistent with their treatment of impairments of other assets.
Revaluation
The FASB holds that revaluation of the right-to-use asset would reflect amortization and impairment. Adjusting based on fair value would generally not be permitted. The IASB refers to revaluation models in IAS 16 for property, plant, & equipment, and IAS 38 for intangible assets, which do permit revaluing based on fair value.
Initial direct costs
Initial direct costs for negotiating and arranging leases are to be expensed as incurred.
Transition
This was a big hole in the preliminary views document. Both boards agreed that leases should be set up using the remaining rents as of the date of application of the new standard, valuing the obligation at the present value of the rents (using the current incremental borrowing rate), and setting the asset to the same value (the IASB notes that there could be an impairment adjustment).
Nothing, however, is said about how to handle the existing deferred liabilities on existing operating leases with scheduled rent increases, or the difference between asset and liability on existing capital leases. Will this be taken directly to retained earnings, or recognized as a gain or loss in the income statement? Most lessees would probably prefer to recognize the change in the income statement, because almost all leases (leveled operating and capital) would show a gain on removal. The argument would be that they have in effect over-expensed these leases, so they should be able to recover that excess expense as part of the changeover.
Next steps
The discussion paper comment period closes a week from Friday, July 17. The boards plan to discuss the comments at meetings in September. In July there will be another meeting to discuss additional matters related to lessor accounting (following up their May meeting); I haven’t seen a specific date yet. The two boards will be holding joint meetings on July 23 & 24, but I don’t see any indication whether they will take that time to discuss leases, or will continue their more typical practice of meeting separately to discuss the issues.
Sources for board information:
IASB meeting summary: http://www.iasb.org/Current+Projects/IASB+Projects/Leases/Meeting+Summaries+and+Observer+Notes/IASB+June+2009.htm
IASB meeting audio: http://www.iasb.org/Current+Projects/IASB+Projects/Leases/Meeting+Audio+Playback/Meeting+Audio+Playback.htm
IASB meeting agenda papers: http://www.iasb.org/Meetings/IASB+Board+Meeting+18+June+2009.htm
FASB meeting summary: http://www.fasb.org/leases.shtml
Meeting handout: http://www.fasb.org/cs/ContentServer?c=Document_C&pagename=FASB%2FDocument_C%2FDocumentPage&cid=1176156247551
Sale and leaseback transactions
An asset (most commonly real estate) may be sold and immediately leased back. FAS 98 has an extensive set of tests to determine whether the continuing involvement of both seller/lessee and buyer/lessor are such that the transaction should be recognized as a sale and a lease, or as a financing that doesn’t meaningfully transfer the asset, so that it would remain on the books of the putative seller/lessee. Sale/leasebacks are sometimes done for cash flow purposes; at other times, a major purpose under current accounting may be off-balance sheet financing. With the end of operating lease accounting under the new rules, the latter purpose would disappear.
The boards decided that in a sale/leaseback, the entire asset should be derecognized and replaced with a right-to-use asset (rather than keeping a portion of the original asset on the seller/lessee’s books). The IASB concluded that a gain should be recognized immediately; the FASB’s meeting summary doesn’t indicate their decision. The FASB thinks there may be a need for additional guidance when the sale price or rental payments aren’t at market rates.
Impairments
Existing general accounting standards for impairments should also be used for lease right-to-use assets. This means that US lessees would use FAS 144, while IFRS users would use IAS 36, consistent with their treatment of impairments of other assets.
Revaluation
The FASB holds that revaluation of the right-to-use asset would reflect amortization and impairment. Adjusting based on fair value would generally not be permitted. The IASB refers to revaluation models in IAS 16 for property, plant, & equipment, and IAS 38 for intangible assets, which do permit revaluing based on fair value.
Initial direct costs
Initial direct costs for negotiating and arranging leases are to be expensed as incurred.
Transition
This was a big hole in the preliminary views document. Both boards agreed that leases should be set up using the remaining rents as of the date of application of the new standard, valuing the obligation at the present value of the rents (using the current incremental borrowing rate), and setting the asset to the same value (the IASB notes that there could be an impairment adjustment).
Nothing, however, is said about how to handle the existing deferred liabilities on existing operating leases with scheduled rent increases, or the difference between asset and liability on existing capital leases. Will this be taken directly to retained earnings, or recognized as a gain or loss in the income statement? Most lessees would probably prefer to recognize the change in the income statement, because almost all leases (leveled operating and capital) would show a gain on removal. The argument would be that they have in effect over-expensed these leases, so they should be able to recover that excess expense as part of the changeover.
Next steps
The discussion paper comment period closes a week from Friday, July 17. The boards plan to discuss the comments at meetings in September. In July there will be another meeting to discuss additional matters related to lessor accounting (following up their May meeting); I haven’t seen a specific date yet. The two boards will be holding joint meetings on July 23 & 24, but I don’t see any indication whether they will take that time to discuss leases, or will continue their more typical practice of meeting separately to discuss the issues.
Sources for board information:
IASB meeting summary: http://www.iasb.org/Current+Projects/IASB+Projects/Leases/Meeting+Summaries+and+Observer+Notes/IASB+June+2009.htm
IASB meeting audio: http://www.iasb.org/Current+Projects/IASB+Projects/Leases/Meeting+Audio+Playback/Meeting+Audio+Playback.htm
IASB meeting agenda papers: http://www.iasb.org/Meetings/IASB+Board+Meeting+18+June+2009.htm
FASB meeting summary: http://www.fasb.org/leases.shtml
Meeting handout: http://www.fasb.org/cs/ContentServer?c=Document_C&pagename=FASB%2FDocument_C%2FDocumentPage&cid=1176156247551
Monday, June 15, 2009
Proposed changes to lessor accounting
The FASB and IASB met separately on May 18 & May 20 (respectively) to discuss changes to lessor accounting consistent with the move to a right-to-use model for lease accounting. As previously discussed, the boards had decided to delay lessor accounting changes and move ahead with lessee accounting only, because they felt that the need for changes was more urgent for lessee accounting and lessor accounting had complexities that would slow the whole process down.
Now they're getting started with looking at lessor accounting directly, in part perhaps because they realized that sublease accounting is inevitably affected by lessee accounting, and sublease and lessor accounting are inextricably linked.
The boards dealt with a fundamental question in their approach to lessor accounting: Does a lease result in a transfer of a portion of the leased item from lessor to lessee, or does it create a new right and obligation for the lessor? Or as the staff puts it in their discussion paper, "What is the credit?" (Additional examples, with sample journal entries, are in a second discussion paper.) The debit in the transaction is clearly the creation of a receivable representing the discounted flow of rents. Should the credit be recognized as a reduction in the value of the asset on the lessor's books (a derecognition of part of the asset), or should the asset remain untouched and a separate performance obligation created to reflect the requirement to allow the lessee to use the asset?
The FASB staff, which wrote up the discussion paper, favored the first approach (Approach A), derecognizing a portion of the lessor's asset and keeping only the net on the lessor's books. However, the boards decided instead to recognize a performance obligation. The discussion at the IASB (available by webcast until August 19) raised a number of concerns with Approach A, one of the most compelling apparently being that it would result in a steadily diminishing asset on the books which could eventually go negative (if a building that is mostly depreciated, or land recorded at historical cost, is leased based on current market value). A separate but related issue was whether profit should be recognized at the inception of the lease. This is currently permitted for manufacturers and dealers under sales-type leases, but not for direct financing leases. A number of board members did not want to permit recognition of profit at inception, and Approach A was seen as facilitating or even demanding profit recognition. The FASB also preferred Approach B, with members stating their position in favor of no immediate profit recognition and keeping the full asset on the lessor's books as long as the lessor retains title. (A concern raised and not resolved by both boards was whether treatment should be different if the lease transfers ownership at the end of the lease term, so that no interest in the asset remains with the lessor.)
The boards remain concerned about opportunities for structuring transactions to avoid the regulations, and are trying to craft the new regulations to reduce the potential for structuring, ensuring that legal forms don't facilitate treating differently transactions of similar economic substance.
Next steps:
In meetings scheduled for July, the boards will discuss initial and subsequent measurement and presentation of the asset and liability, as well as how to recognize contingent rents and options. (The second discussion paper for the May meetings made assumptions for measurement, but these have not been decided on by the boards.) Additional items for discussion, not necessarily at the July meeting, include how to differentiate a sale of an asset from a lease, and whether the right-to-use model should apply to short-term and immaterial leases. Following that meeting, the boards will decide whether they have made enough progress on lessor accounting to include it in the Exposure Draft scheduled for mid-2010, or if the ED should remain lessee-only.
Now they're getting started with looking at lessor accounting directly, in part perhaps because they realized that sublease accounting is inevitably affected by lessee accounting, and sublease and lessor accounting are inextricably linked.
The boards dealt with a fundamental question in their approach to lessor accounting: Does a lease result in a transfer of a portion of the leased item from lessor to lessee, or does it create a new right and obligation for the lessor? Or as the staff puts it in their discussion paper, "What is the credit?" (Additional examples, with sample journal entries, are in a second discussion paper.) The debit in the transaction is clearly the creation of a receivable representing the discounted flow of rents. Should the credit be recognized as a reduction in the value of the asset on the lessor's books (a derecognition of part of the asset), or should the asset remain untouched and a separate performance obligation created to reflect the requirement to allow the lessee to use the asset?
The FASB staff, which wrote up the discussion paper, favored the first approach (Approach A), derecognizing a portion of the lessor's asset and keeping only the net on the lessor's books. However, the boards decided instead to recognize a performance obligation. The discussion at the IASB (available by webcast until August 19) raised a number of concerns with Approach A, one of the most compelling apparently being that it would result in a steadily diminishing asset on the books which could eventually go negative (if a building that is mostly depreciated, or land recorded at historical cost, is leased based on current market value). A separate but related issue was whether profit should be recognized at the inception of the lease. This is currently permitted for manufacturers and dealers under sales-type leases, but not for direct financing leases. A number of board members did not want to permit recognition of profit at inception, and Approach A was seen as facilitating or even demanding profit recognition. The FASB also preferred Approach B, with members stating their position in favor of no immediate profit recognition and keeping the full asset on the lessor's books as long as the lessor retains title. (A concern raised and not resolved by both boards was whether treatment should be different if the lease transfers ownership at the end of the lease term, so that no interest in the asset remains with the lessor.)
The boards remain concerned about opportunities for structuring transactions to avoid the regulations, and are trying to craft the new regulations to reduce the potential for structuring, ensuring that legal forms don't facilitate treating differently transactions of similar economic substance.
Next steps:
In meetings scheduled for July, the boards will discuss initial and subsequent measurement and presentation of the asset and liability, as well as how to recognize contingent rents and options. (The second discussion paper for the May meetings made assumptions for measurement, but these have not been decided on by the boards.) Additional items for discussion, not necessarily at the July meeting, include how to differentiate a sale of an asset from a lease, and whether the right-to-use model should apply to short-term and immaterial leases. Following that meeting, the boards will decide whether they have made enough progress on lessor accounting to include it in the Exposure Draft scheduled for mid-2010, or if the ED should remain lessee-only.
Tuesday, May 5, 2009
Types of EZ13 reports
This is in some ways a continuation of the prior blog entry on how to create spreadsheet output.
EZ13 provides several types of reports. Let's look at what each provides. (I'll describe specifically the spreadsheet output type #1; the text report includes basically the same information, but laid out differently.)
1) Income Statement/Balance Sheet Detail: This is our most comprehensive report of calculated information (all of the accounts involved in lease accounting for a period). We've tried to break out every account so you can see exactly what's happening. Each balance sheet account, for instance, shows five different values: beginning balance, added (for new leases), activity, removed (for terminations), and ending balance. In all, this report shows some 74 columns of calculated data, plus as many as 43 columns of descriptive information (including account numbers if you define them).
And that's just the first tab. On the second tab, we show the future minimum rent information. If you get minimum rents broken out by year for the first 5 years, then all remaining as a lump sum (as FAS 13 requires), the second tab shows 42 columns of calculated data per lease.
2) Income Statement/Balance Sheet Compact: Maybe that's overkill for you. The compact report shows 16 columns of calculated data, giving the essential highlights (just the ending balance for each balance sheet account, for instance).
3) Journal Entries: You may prefer to see each transaction a lease generates in journal entry form (each rent payment is a debit to obligation, a debit to accrued interest, and a credit to cash; etc.). Each line shows the lease number, period start and end date, account name, account number (if defined), debit or credit, and a description of the transaction so you know which lines go together and what they're for.
4) Amortization Schedule - Capital & Operating: You can view the activity for the entire life of a lease, with a separate line entry for each rent payment. Note that this report can get very large if you have many long leases; if you have several hundred leases that run 20 years or more paid monthly, you could exceed the maximum number of rows (65536) in versions of Excel before Office 2007. If that happens, you'll need to select subgroups of leases to report on (or upgrade Excel; the 2007 version permits over 1 million rows).
5) Future Minimum Rents: This report is identical to the second tab of the Income Statement/Balance Sheet Detail report. It's provided in case you only need future rent information.
6) Depreciation Over Economic Life: If you have leases that have an ownership transfer or bargain purchase option, they are depreciated over their economic life, which in most cases is longer than the lease term. Regular EZ13 reports stop reporting on a lease when it expires. This report shows the depreciation after the lease's expiration, until the end of its economic life.
7) Classification Summary: Lists how each lease fits into the four tests for capitalization; if the lease is capital, its capital rate is shown.
8) Listing: As mentioned above, this report is not available in spreadsheet format except as an export of a text report. The reason is that there is really no way to show all the input information for a lease across a single row: There can be an indeterminate number of rent steps, for instance, which can easily overwhelm the maximum number of columns in Excel.
I hope this helps you get the results most useful to you. Most accountants and financial people live in Excel, and it's also a common method of importing and exporting data (such as loading results of EZ13 into a general ledger system). Knowing the best way to get the spreadsheet information you want can make EZ13 much more useful.
EZ13 provides several types of reports. Let's look at what each provides. (I'll describe specifically the spreadsheet output type #1; the text report includes basically the same information, but laid out differently.)
1) Income Statement/Balance Sheet Detail: This is our most comprehensive report of calculated information (all of the accounts involved in lease accounting for a period). We've tried to break out every account so you can see exactly what's happening. Each balance sheet account, for instance, shows five different values: beginning balance, added (for new leases), activity, removed (for terminations), and ending balance. In all, this report shows some 74 columns of calculated data, plus as many as 43 columns of descriptive information (including account numbers if you define them).
And that's just the first tab. On the second tab, we show the future minimum rent information. If you get minimum rents broken out by year for the first 5 years, then all remaining as a lump sum (as FAS 13 requires), the second tab shows 42 columns of calculated data per lease.
2) Income Statement/Balance Sheet Compact: Maybe that's overkill for you. The compact report shows 16 columns of calculated data, giving the essential highlights (just the ending balance for each balance sheet account, for instance).
3) Journal Entries: You may prefer to see each transaction a lease generates in journal entry form (each rent payment is a debit to obligation, a debit to accrued interest, and a credit to cash; etc.). Each line shows the lease number, period start and end date, account name, account number (if defined), debit or credit, and a description of the transaction so you know which lines go together and what they're for.
4) Amortization Schedule - Capital & Operating: You can view the activity for the entire life of a lease, with a separate line entry for each rent payment. Note that this report can get very large if you have many long leases; if you have several hundred leases that run 20 years or more paid monthly, you could exceed the maximum number of rows (65536) in versions of Excel before Office 2007. If that happens, you'll need to select subgroups of leases to report on (or upgrade Excel; the 2007 version permits over 1 million rows).
5) Future Minimum Rents: This report is identical to the second tab of the Income Statement/Balance Sheet Detail report. It's provided in case you only need future rent information.
6) Depreciation Over Economic Life: If you have leases that have an ownership transfer or bargain purchase option, they are depreciated over their economic life, which in most cases is longer than the lease term. Regular EZ13 reports stop reporting on a lease when it expires. This report shows the depreciation after the lease's expiration, until the end of its economic life.
7) Classification Summary: Lists how each lease fits into the four tests for capitalization; if the lease is capital, its capital rate is shown.
8) Listing: As mentioned above, this report is not available in spreadsheet format except as an export of a text report. The reason is that there is really no way to show all the input information for a lease across a single row: There can be an indeterminate number of rent steps, for instance, which can easily overwhelm the maximum number of columns in Excel.
I hope this helps you get the results most useful to you. Most accountants and financial people live in Excel, and it's also a common method of importing and exporting data (such as loading results of EZ13 into a general ledger system). Knowing the best way to get the spreadsheet information you want can make EZ13 much more useful.
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