In brief: Lease accounting proposal expected by mid-May 2013; alternative views expressed (No. 2013-19)

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In brief 04/11/2013 by Assurance services
In brief: Lease accounting proposal expected by mid-May 2013; alternative views expressed (No. 2013-19)

At a glance

The FASB met on April 10, 2013 to discuss the costs, benefits, and complexity associated with the proposed lease accounting rules. The FASB members expressed their individual points of view and voted 4 to 3 in favor of moving forward with the revised exposure draft. The FASB and IASB expect to issue a joint exposure draft in mid-May 2013. This In brief article provides an overview of the decisions reached at the FASB meeting.

What's new?

The FASB met on April 10, 2013 to discuss the costs, benefits, and complexity associated with the proposed lease accounting rules. The FASB members expressed their individual points of view and voted 4 to 3 in favor of moving forward with the revised exposure draft. The FASB and IASB expect to issue a joint exposure draft in mid-May.

Why do the majority of FASB members support the proposal?

Most of the four FASB members who voted in favor of the proposal acknowledged that a single lease accounting model would be simpler than the dual income statement recognition approach proposed. However, they recognized the feedback from constituents that a single model would not reflect the different economics of lease transactions.

Additional support included views that:

  • The decision to proceed with a dual approach reflects a cost-benefit trade-off that is consistent with decisions reached in other major projects (e.g., financial instruments, revenue recognition, and insurance).
  • The proposal reduces balance sheet complexity by including nearly all leases on the balance sheet (except short-term leases).

Leslie Seidman, FASB chairperson, supported the proposal but expressed concern with the dividing line for classifying a lease as a Type 1 (front-loaded recognition) or Type 2 (straight-line recognition) lease. She plans to suggest an alternative view of where the line should be drawn in the basis for conclusions. 

Why do some FASB members intend to express alternative views?

Three FASB members expressed their concerns with the proposal and stated that they will present alternative views as part of the revised exposure draft. They believe the revised proposal is complex and does not meet the needs of financial statement users.

Specific comments included:

  • Financial statement users will need to piece together information from multiple places in the financial statements to get a complete picture of an entity’s lease transactions. Further, this may not even be possible because all of the relevant information may not be disclosed.
  • The proposal replaces the existing bright-line lease classification model with a principles-based lease classification model that involves judgment. People may not be willing or able to make this judgment from a cost-benefit perspective.
  • A dual approach inevitably creates challenges about where the dividing line should be drawn and may not achieve the desired results for all types of lease transactions. Further, the proposed disclosures do not help financial statement users understand the difference in economics between the two types of leases identified.

What's next?

The FASB and IASB have been working jointly to achieve a converged lease accounting standard. They expect to issue a joint revised exposure draft in mid-May 2013 with a 120-day comment period. The FASB has indicated it will perform extensive outreach during the comment period.

Questions?

PwC clients who have questions about this In brief should contact their engagement partner. Engagement teams that have questions should contact the Leasing team in the National Professional Services Group (1-973-236-7805).

Authored by:

Tom Wilkin
Partner
Phone: 1-973-236-4251
Email: tom.wilkin@us.pwc.com

David Humphreys
Partner
Phone: 1-973-236-4023
Email: david.humphreys@us.pwc.com

Ashima Jain
Managing Director
Phone: 1-408-817-5008
Email: ashima.jain@us.pwc.com