Fallowing FASB: leases, revenue recognition proposals on the horizon.

• Author: Mintzer, Andy
• Position: Regulatorynews

there are two proposals their way through FASB that will have far-reaching implications for most financial statements--including those of private companies. Even though neither of these proposals has been finalized, there seems to lie little doubt that the major concepts have been determined.

Since these accounting changes could affect all companies, all practitioners will lie well served to at least check in to see what the fuss is about.

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Leases

What is the big change with lease accounting? The answer is easy: Capitalize (just about) every lease!

Under accounting rules that have existed for eons, the majority of leased assets do not appear on the balance sheet. Remember the good old days of calculating the net present value of the initial lease payments and testing to see if that total equaled 90 percent or more of the fair market value of the property? And remember all those finance companies that offered lease terms equal to 89.9 percent of the present value just so the company could avoid capitalization? Well those days will soon be gone.

The new rule will require that all leases with a "maximum possible term" of more than 12 months be capitalized--requiring that the asset and lease liability appear Cu the balance sheet.

So after this becomes effective any asset a business leases with a maximum possible term of more than 12 months will be capitalized and the liability recorded. And if you think this does not apply to some businesses because they have no intention of entering into new leases, know that there will be no grandfathering of existing leases. That means all leases will be subject to asset and debt capitalization, which could have some far-reaching consequences for some contracts that refer to specific GAAP measurements, like bank debt covet unit calculations.

Although it's certain that. the leased asset and indebtedness will be capitalized, the recognition, measurement and presentation, of expenses and cash flows will depend on the type of asset leased and how it is being used. The devil, as always, is in the details, and practitioners should study the proposal to determine how it applies to them.

FASB has not published an effective date for this standard. The board will consider the effective date when it deliberates the final standard later this year. It is possible that: private entities will be given a deferred effective date. Practitioners are advised to monitor the status of this project at...