Proposed new lease rules: what now?

• Author: Davis, Betty F.
• Position: FINANCIAL REPORTING

The much-awaited second exposure draft on the new leasing standard has been issued, the comment letter deadline has passed and most of the roundtables have been held. Yet, many observers and stakeholders are still wondering when the proposed new rules for leases will be finalized, or whether they ever will.

Almost everyone who has been following the project closely agrees it is unlikely that everything in the latest draft, which was issued in May, will be reflected in whatever rules that may eventually be adopted.

As of late September, 596 comment letters were posted to the FASB's website. Though most of the comments appear to support the concept of including lessees' operating lease liabilities on the balance sheet, they generally do not support the boards' (Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB)) latest joint proposal for achieving that primary objective.

When the FASB and IASB took on the leasing project more than five years ago, primary stated objectives included enhancing financial statement transparency by requiring lessees to recognize lease-related assets and liabilities on the balance sheet and fixing other shortcomings. In particular, multiple lease models in today's accounting can result in a different treatment of economically similar transactions and the existence of "bright lines" enables structuring around the rules to achieve an off-balance-sheet result.

As evidence that current lease accounting is broken, the boards cited the practice of analysts using their own formulas to put operating lease liabilities on the balance sheet prior to assessing a company's financial position. The U.S. Securities and Exchange Commission's (SEC) 2005 report on off-balance-sheet financing--which identified leases as an area requiring reconsideration--also played a role in moving the project forward.

The boards believed that users of financial statements in particular did not have sufficient information to evaluate companies engaged in leasing transactions in a consistent manner. However, the broadly critical tone of the comment letters, roundtable discussions and other feedback provided to the boards undercuts the view that most all users are clamoring for the wholesale changes proposed in this latest exposure draft.

Key Examples of Feedback

Views in the comment letters range from suggesting that the current accounting model is working just fine and should not be changed in any...