CFO Studio Magazine, Fall 2011
New lease accounting standards promise to change the way CFOs report leases in financial statements
WHEN IT COMES to the way the U.S. Financial Accounting standards Board (FASB) works, there’s nothing as permanent as change. Indeed, the set of standards that guide accounting principles in this country are always evolving.
Currently up for discussion are new lease accounting standards being developed in a joint project between the FASB and the International Accounting Standards Board (IASB). Suggested changes that seek to more closely align U.S. reporting guidelines with the ones used outside this country were recently “re-exposed” to the financial community here, giving interested parties an almost unprecedented second opportunity to comment. These proposed changes, as written, completely overhaul the way leases are reported in financial statements. The new standard would effectively eliminate all “operating leases” and require them to be capitalized on a company’s balance sheet. It would also replace rent payment expense reporting with interest and depreciation expense reporting. Lessees (and possibly lessors) would have to change fundamentally the way they account for real estate and equipment leasing transactions, providing more extensive financial statement disclosures than ever before. For lessees, the new standards would also replace rent payment expense reporting with interest and amortization expense reporting.
Peter Bible, partner at EisnerAmper, LLP, says that the main thing CFOs must consider is how these changes will impact on lease vs. buy decisions going forward. “Historically, the lease vs. buy decision contained an element known as off-balance sheet financing, which operating lease treatment provided,” Bible explains. “Under the Proposed standard, this option would be removed as virtually all leases would be on balance sheet. Accordingly, CFOs need to focus on the economics of the alternatives.”