Accounting for leases: A moving target

While leasing is an important tool, enabling companies to use property, plant, and equipment without making large initial cash outlays, the practical application of the sometimes form-driven, often complex, accounting literature can be challenging.

Lessee motivations are as varied as the applicable accounting – and leases, particularly those governing real estate, often have a material impact on financial statements. Highly tailored arrangements such as leases of assets to be constructed or significantly improved, real estate sale-leasebacks, synthetic leases, master lease arrangements, and vendor financing arrangements present additional challenges.

And there’s significant potential change on the horizon as well. With critics charging that current lease accounting rules often do not portray the true economics of lease arrangements – and many constituents agreeing that greater transparency is needed in these kinds of off-balance-sheet obligations – the standard-setting boards are pushing for change.

The Financial Accounting Standards Board (FASB) and International Accounting Standards Board (IASB) have been working for many years on new comprehensive standards. In re-deliberations following the May 2013 Exposure Draft the Boards have decided to propose similar requirements for how they will define a lease, how leased assets and liabilities will be recognized in the balance sheet, and how lease liabilities will be measured. However, differences between the Boards remain – the IASB is planning to move forward with a model that treats all leases as financings in the income statement In contrast, the FASB has proposed a dual model for income statement presentation similar to what we have today.

Navigating the complex, and changing, leasing guidance – and applying it to the specific facts and circumstances around your business – requires a deep understanding of the applicable standards and lease application processes. Getting it wrong could have an adverse impact on your business beyond just the financial statements; the effect on debt covenants or a proposed capital markets transaction can also be significant.

Contact us to learn more about how we can help you ensure your financial reporting will be compliant with the leasing standard – and manage your lease business and process transformation in an efficient and measured way.