The Financial Accounting Standards Board will meet with its international counterpart later this week to discuss just how much it can accomplish in its joint project to revise lease accounting, with FASB championing a recently expanded view.

FASB and IASB have been working together to develop new standards on lease accounting, focusing their attention so far only on the accounting for lessees, or those who acquire property or other assets under lease contracts. The boards planned to save for another day the accounting that should be required for lessors, or the ones who hand over property and collect revenue under a lease arrangement.

In a regularly weekly meeting, FASB and its staff waded through the intricacies of how to develop a standard without getting excessively tripped up by the differences for lessees compared with lessors, not to mention the implications for sub-leasing. Board members said they’d be hesitant to make firm decisions on what kind of accounting to require of lessees without also considering how the same transactions will look on the lessor’s books.

“It isn’t efficient to go out with a discussion paper that ignores lessor accounting,” said FASB member George Batavick. “If you put it out you’re going to get comments that say I can’t comment on this because I don’t know what the implications are. They’d be saying things that are obvious.”

Chairman Bob Herz worried it would lead to a “train wreck.” Batavick said it doesn’t make sense to have different accounting models in place for lessees compared with lessors because it will lead to gaming. “Given some of the motivations that some preparers have, I could see us never having a lessee-lessor relationship again,” he said.

The board ultimately determined it wants the project to include not only transactions that are described as leases but also transactions that are “in substance” an acquisition, though it tangoed over what kind of terminology to use to describe such transactions. The board determined such an approach is important to determining the revenue recognition for the lessor, so should be addressed in an initial discussion paper in its joint project with IASB.

The Financial Accounting Standards Board and the International Accounting Standards Board are targeting February 2009 to publish a discussion paper on how they plan to overhaul lease accounting.

The boards met separately this week to hash out a number of areas where they either didn’t share the same view or hadn’t yet considered the issues to try to establish fully converged views on how to write new standards for U.S. Generally Accepted Accounting Principles and International Financial Reporting Standards. FASB decided for its part that it wants to see lease terms deemed a recognition issue, which would require entities to make some upfront judgments about their likely obligations over the expected life of the lease if they have some uncertainty about their ultimate obligations.

For example, when an entity has a 10-year lease with an option to renew for another five years, a recognition approach would require the entity to decide for how long it is likely to lease the property or equipment and recognize that term at the front end of the lease. The decision would take into account all contractual, non-contractual, and business factors.

FASB staff and board members were keen to steer clear of language that would be interpreted as commanding detailed number crunching. “It’s not a purely statistically based analysis,” said board member Tom Linsmeier during the Webcast meeting. “That might be a starting point to think about things.”

The Board decided it wants to require entities to make some estimates about what they expect to pay over time when lease terms are measured on factors other than time, such as when leases are based on sales or profitability. FASB determined an entity should be expected to determine its best estimate of the range of possible outcomes and the likelihood of each, but it should not be expected to attach weighted probabilities to each of those outcomes to determine the expected lease payments. If lease terms are based on changes in an index or a rate, however, then measurement should rely on the index or rate at the time of inception with a best estimate of expected lease payments.

The two boards plan to compare notes again from their separate meetings on the various outstanding issues to determine if they can publish the discussion paper with fully converged views or if they may publish various views on specific issues asking constituents to weigh in on the areas of debate.