As of today, 697 comment letters have been posted responding to the exposure draft on Lease Accounting. The IASB has decided that they couldn't host all the comment letters; instead, you need to go to the FASB's web site to view those numbered 248 and higher (letters 1-247 are available on both sites). Some of the letters were received after the deadline, but have still been accepted.
There are far too many comment letters for me to review them all. But I think it's fair to say that the overwhelming majority object to including renewal options in the calculated lease term using the "more likely than not to be renewed" criterion, and to including most contingent rents in the capitalized rent stream. Many respondents are concerned about the cost of initial and ongoing implementation of the new standard (particularly if lease term and contingent rents need to be estimated and capitalized); many also think the new proposed methodology is inconsistent with their business models. Many are also concerned about the impact of reclassifying rent expense into amortization and interest expense, since the new classification moves the cost out of EBITDA (earnings before interest, taxes, depreciation, and amortization), which is an important metric for many companies. Other concerns expressed include the timing of expense recognition (front-loaded under the new model, as opposed to level under current operating lease accounting), potential for violation of debt covenants because companies will be reporting more debt, difficulty of getting expense reimbursements on cost-based contracts, and volatility of earnings (if the lease term & contingent rent proposals are maintained).
The lessor accounting proposal has varied reactions. Some agree with the proposal. Others think derecognition should be used for all lessor leases. One common complaint about the performance obligation approach is that it leads to double-counting (or even triple-counting) of assets: the lessor maintains the original asset on the books, sets up a lease receivable (another asset), and the lessee recognizes an asset for the right-of-use as well. The impact of double-counting for the lessor is mitigated by the proposal to report PO leases net (receivable minus PO), but it still seems conceptually strange to many people. It is also noted that the PO approach does not mirror lessee accounting.
The volume and vehemence of disagreement raises the bar, in my opinion, on review by the boards. We'll see what comes in the next few months.
Thursday, December 30, 2010
Tuesday, December 14, 2010
More comment letters and other discussion
Comment letters on the proposed new lease accounting standard continue to come in to the boards. Tomorrow (Dec. 15) is the official deadline to submit a comment (though for the preliminary views document, they did continue to accept and post letters received later). Surprisingly, only a handful of letters have been posted since late last week. I have to think that reflects delays, not actual numbers of letters. As I write this, the count of letters posted is 114.
Few if any of the letters agree completely with the boards, and many vehemently oppose some or many of the provisions, on conceptual grounds (such as arguing that unexercised options are not liabilities), on practical grounds (complying will be burdensome for little perceived benefit), and for their implications (loan covenants will be breached, cost recovery contracts that are based on operating leases will be invalidated, etc.). Several are calling for delaying release until the standard can be thoroughly reviewed and reworked, particularly on the lessor side; others are calling for a lengthy implementation period (up to 5 years).
There are so many different objections it'll be a major task for the boards' staff to organize them, not to mention for the boards to consider them. A number of complaints refer to the impact on very specific situations of individual industries ("wet" vs. "dry" leases of planes and ships, for instance, meaning leases that do or don't include personnel to operate the vehicle). Many complain that the proposed standard will harm their business model; numerous letters suggest that the current economic downturn will be further extended because of it.
Asset Finance International reports that at a Nov. 5 meeting in London between lessors and members of the IASB, an IASB member stated that the boards weren't open to reconsidering the capitalization of lessee leases, but that they were willing to reconsider how to measure the asset, including the question of options and contingent rents.
The boards have indicated that they will consider carefully comments and suggestions made at the roundtable discussions scheduled for both in London & Hong Kong later this month and early January in the U.S. I will be participating in the afternoon session on Jan. 6, 2011, in Norwalk, CT (the FASB's headquarters).
Few if any of the letters agree completely with the boards, and many vehemently oppose some or many of the provisions, on conceptual grounds (such as arguing that unexercised options are not liabilities), on practical grounds (complying will be burdensome for little perceived benefit), and for their implications (loan covenants will be breached, cost recovery contracts that are based on operating leases will be invalidated, etc.). Several are calling for delaying release until the standard can be thoroughly reviewed and reworked, particularly on the lessor side; others are calling for a lengthy implementation period (up to 5 years).
There are so many different objections it'll be a major task for the boards' staff to organize them, not to mention for the boards to consider them. A number of complaints refer to the impact on very specific situations of individual industries ("wet" vs. "dry" leases of planes and ships, for instance, meaning leases that do or don't include personnel to operate the vehicle). Many complain that the proposed standard will harm their business model; numerous letters suggest that the current economic downturn will be further extended because of it.
Asset Finance International reports that at a Nov. 5 meeting in London between lessors and members of the IASB, an IASB member stated that the boards weren't open to reconsidering the capitalization of lessee leases, but that they were willing to reconsider how to measure the asset, including the question of options and contingent rents.
The boards have indicated that they will consider carefully comments and suggestions made at the roundtable discussions scheduled for both in London & Hong Kong later this month and early January in the U.S. I will be participating in the afternoon session on Jan. 6, 2011, in Norwalk, CT (the FASB's headquarters).
Tuesday, November 30, 2010
Our comment letter posted
The count of comment letters on the lease accounting standard is now up to 60, with a little more than two weeks to go. Our comment letter is #58.
Monday, November 22, 2010
Comment letters coming in
The lease accounting exposure draft has already received 45 comment letters, with almost a month to go until the deadline (Dec. 15). By comparison, the March 2009 discussion paper had received just 5 comment letters a month before its deadline. Since the DP got 302 responses, one can fairly expect a considerably larger number of responses to the ED. I don't know an easy way to compare with responses to other EDs, but I think it's fair to guess that this will be one of the more heavily commented on.
All or almost all letters from companies that will need to comply, and many of those from independent accountants, disagree with the proposal to capitalize renewal options and contingent rentals (unless the contingent rentals are disguised minimum lease payments). They make three basic arguments: options that haven't been exercised don't meet the conceptual definition of a liability, the estimates will be highly subjective guesswork, and the burden of complying will be onerous (for questionable benefit).
Some companies argue for keeping operating lease accounting, saying that it better matches expenses to benefits (capitalization results in more expense in the early years of a lease, less at the end, due to the interest method of amortizing the liability).
A number of lessors (and some users of statements) dislike the performance obligation approach, because it is asymmetrical with lessee accounting, it double-counts assets (though the ED calls for the final presentation in the financial statements to be net), and they're concerned that the dividing line between performance obligation and derecognition will be arbitrary. Most would prefer derecognition for all lessor leases, except for short-term leases. I haven't seen any deal with the issue of a re-leased asset that has been fully derecognized.
Will the boards bend to the complaints?
It's not too late for you to add your own voice. Anyone is welcome to submit a letter (see details on how in my earlier post). Current letters include official national bodies, companies from all over the world, individual accountants, accounting students, and a few random people seemingly just speaking for themselves. We'll submit a letter in the next couple of weeks.
Friday, October 29, 2010
Notes from yesterday's FASB webcast
As previously mentioned, the FASB yesterday offered a one-hour webcast reviewing the proposed new lease accounting standard, for which the Exposure Draft was released in August. The webcast is now available for viewing if you weren't able to view it live (free registration required).
The webcast included both a basic description of the new methodology proposed, and intermittent commentary by Larry Smith, a FASB board member, regarding why particular decisions were made.
On requiring capitalization of options to renew, Mr. Smith said, "The boards wanted to ensure that entities would not structure a one-year lease with additional one-year options to renew with the full intent of a 15-year lease. We wanted to ensure that the lease amounts recorded reflected the true substance of the lease and therefore reflected the likely lease term, which we acknowledge impacts many aspects due to the discounting required. "
Similarly, for contingent rents: "We were concerned with entities in an extreme example having a fixed rent payment of $1, then various contingent and other variable payments which make the monthly expense closer to a million. We wanted to lay out a principle that would capture all expected lease payments to ensure that amounts recorded associated with leases were transparent and inclusive of all lease payments expected."
Obviously the boards are haunted by the structuring that has been common in leasing under FAS 13 (and IAS 17), and are doing everything they can to prevent something like that from happening again. But Mr. Smith says they're open to alternative ways of dealing with the situation; they recognize that they've chosen a method that's complex to implement.
They included preliminary feedback: They feel generally there is agreement with the right-of-use model, but concern about the complexity of contingent rents & determining the lease term, the income statement impact (rather than equal expenses over the life of the lease, depreciation plus interest gives front-end-loaded expenses), differentiating leases from services (and separating service components), applying performance obligation vs. derecognition for lessors, cost/benefit, and doing the transition.
They took questions from viewers of the webcast and answered some. Highlights:
* The boards plan to provide more guidance on distinguishing a service from a lease (and distinct services). They recognize that it will be more significant than it is under FAS 13.
* The FASB plans to consider whether investment property should be accounted for at fair value, as IAS 40 provides (either as an option or mandatory).
* Driving the project is a desire to provide better comparability (eliminating the bright lines between capital and operating leases) and more information to users, who they feel are already attempting to calculate balance sheet impacts on operating leases with limited information.
* While the initial focus was on lessees, they recognized a need to be consistent both between lessees and lessors, and between leasing and the concurrent revenue recognition.
* Mr. Smith: "If we did not provide for including an estimate of contingent rents, leases might be structured very differently to come up with an outcome that would record the minimum asset and liability, and we didn't want to provide those structuring opportunities."
* It is recognized that lessees and lessors will come up with different estimates of lease term, contingent rent, and the like. The lessee most often will probably have better information.
The IASB is also having a webcast, this coming Monday (Nov. 1), at 10 AM and 3 PM GMT. More information is available at the IASB website.
The webcast included both a basic description of the new methodology proposed, and intermittent commentary by Larry Smith, a FASB board member, regarding why particular decisions were made.
On requiring capitalization of options to renew, Mr. Smith said, "The boards wanted to ensure that entities would not structure a one-year lease with additional one-year options to renew with the full intent of a 15-year lease. We wanted to ensure that the lease amounts recorded reflected the true substance of the lease and therefore reflected the likely lease term, which we acknowledge impacts many aspects due to the discounting required. "
Similarly, for contingent rents: "We were concerned with entities in an extreme example having a fixed rent payment of $1, then various contingent and other variable payments which make the monthly expense closer to a million. We wanted to lay out a principle that would capture all expected lease payments to ensure that amounts recorded associated with leases were transparent and inclusive of all lease payments expected."
Obviously the boards are haunted by the structuring that has been common in leasing under FAS 13 (and IAS 17), and are doing everything they can to prevent something like that from happening again. But Mr. Smith says they're open to alternative ways of dealing with the situation; they recognize that they've chosen a method that's complex to implement.
They included preliminary feedback: They feel generally there is agreement with the right-of-use model, but concern about the complexity of contingent rents & determining the lease term, the income statement impact (rather than equal expenses over the life of the lease, depreciation plus interest gives front-end-loaded expenses), differentiating leases from services (and separating service components), applying performance obligation vs. derecognition for lessors, cost/benefit, and doing the transition.
They took questions from viewers of the webcast and answered some. Highlights:
* The boards plan to provide more guidance on distinguishing a service from a lease (and distinct services). They recognize that it will be more significant than it is under FAS 13.
* The FASB plans to consider whether investment property should be accounted for at fair value, as IAS 40 provides (either as an option or mandatory).
* Driving the project is a desire to provide better comparability (eliminating the bright lines between capital and operating leases) and more information to users, who they feel are already attempting to calculate balance sheet impacts on operating leases with limited information.
* While the initial focus was on lessees, they recognized a need to be consistent both between lessees and lessors, and between leasing and the concurrent revenue recognition.
* Mr. Smith: "If we did not provide for including an estimate of contingent rents, leases might be structured very differently to come up with an outcome that would record the minimum asset and liability, and we didn't want to provide those structuring opportunities."
* It is recognized that lessees and lessors will come up with different estimates of lease term, contingent rent, and the like. The lessee most often will probably have better information.
The IASB is also having a webcast, this coming Monday (Nov. 1), at 10 AM and 3 PM GMT. More information is available at the IASB website.
Tuesday, October 19, 2010
Investors' opportunity to comment
In September, the FASB & IASB invited lessees and lessors to fill out a survey about their leasing activities and how the proposed new lease standard might affect them. Now users of financial statements (investors, lenders, etc.) are given their own opportunity to comment through a survey. You may respond to the 25 questions any time between now and December 15 (which is also when comment letters on the Exposure Draft are due). No prior knowledge of the ED is assumed; summaries of major points are provided, with users asked whether they favor or oppose the decisions made.
FASB webcast discussion Oct. 28
The FASB will be holding a webcast to discuss the proposed new lease accounting standard on Thursday, Oct. 28, 11 AM to noon Eastern time. The webcast will both review the Exposure Draft and discuss initial reactions that the boards have gained from outreach activities that they have recently undertaken.
Anyone may register for free either to watch the webcast live, or to view it from archive after the fact.
Anyone may register for free either to watch the webcast live, or to view it from archive after the fact.
Subscribe to:
Posts (Atom)
