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Locke Lord QuickStudy: Update: Further FASB Action On GAAP Lease Accounting Rules

12/1/2011

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Update: Further FASB Action On GAAP Lease Accounting Rules

 

The Financial Accounting Standards Board (“FASB”) has issued additional clarifications and modifications in regards to the proposed changes to GAAP lease accounting, since Locke Lord published “Further FASB Decisions on GAAP Lease Accounting Rules“ on July 26, 2011, as a result of their deliberations in their joint meeting with the International Accounting Standards Board in October 2011.

Included among these are the following:

• FASB announced an important new exception, applicable to lessor accounting for investment property (although “investment property” is yet to be defined), from the requirement that lessors use the “receivable and residual” approach to accounting for leases, as described in item two below. Lease accounting for lessors of investment property would, in effect, be accounted for in the same manner as currently in effect for operating leases.
• Lessor accounting for non-investment property would involve the derecognition of the underlying asset on the books of the lessor, and the recognition by the lessor of: (i) a lease receivable, on a discounted present value basis; and (ii) a residual asset, equal to the difference between the discounted present value of the lease receivable, and the book value of the underlying asset. This approach would also involve recognition by lessors of that portion of the gain (represented by the difference between the fair value and book value of the leased property), if any, which is allocable to the lease term.
• Confirmation was provided by FASB as to the transition rules for existing operating leases. For such leases which are in effect as of the effective date of the revised GAAP accounting rules for leases, the accounting treatment of such leases by both lessors and lessees would be required to be changed to comply with the new standards, generally treating such leases under the modified accounting guidelines as if they were new leases entered into for the balance of the lease term on the effective date of the accounting change.

Separately, it is now expected that the timing for issuance of the new exposure draft by FASB of the revised GAAP accounting standards for leases will be Q1 of 2012.

Additionally, as reported in the Wall Street Journal, “Companies Resist Accounting Plan” published on November 16, 2011, retailers, banks and airlines, due to their frequent use of long-term leases, are providing resistance to the new accounting plan, due to the front-loading of expenses associated with the treatment of operating leases under the new proposal, versus the straight-line expense treatment under existing accounting rules for operating leases. The article reported that due to the front-loading effect, it is anticipated that the lease-related expenses of Walgreen Co. would increase by 23 percent in the first year of the proposal.

We will continue to monitor significant developments as to the lease accounting standards, and update you when appropriate. 

Scott Hunsaker | T: 713-226-1279 | shunsaker@lockelord.com