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FASB Panel Says Ditch Lease Accounting Proposal

Tammy Whitehouse | September 4, 2013

An investor advisory panel has told the Financial Accounting Standards Board it should ditch its overly complicated proposed standard on lease accounting and just require some new disclosures with current accounting instead.

FASB's Investor Advisory Committee met with FASB last week to explain their concerns over the complexity of FASB's pending proposal to require new accounting for lease contracts that would bring all leased assets and their related liabilities on to corporate balance sheets. IAC told FASB the current proposal would produce information that would not necessarily be all that helpful or important to users of financial statements.

“Overall, the idea that liabilities related to leases is something that would be helpful to investors -- it's definitely the right idea to get more transparency on that,” said David Trainer, CEO of New Constructs and a member of the IAC. “However, I think the complexities of the underlying activity make it almost impossible to create a one-size-fits-all solution that we can just put on the balance sheet. The most decision-useful information is to enhance disclosure to let analysts who, given their multiple potential interpretations, can do with it what they wish.” He continued that the current proposal is based on accounting constructs that are difficult for many users of financial statements to understand. “I'd rather just have the data there and do with it what I think I need to do with it.”

The committee told FASB that its distinction between property and equipment leases is not important to investors. Investors and analysts aren't necessarily concerned about how leased property is used, they said. Instead, the committee said FASB should focus on requiring companies to reveal more information about their lease obligations, such as average lease terms, median lease terms, and ranges of lease terms, and that would give investors and analysts more information to fully understand a company's lease obligations.

FASB's lease proposal is open for comment through Sept. 13. It is the board's second attempt at a proposal to change lease accounting to rid the current bright-line distinction between capital and operating leases. The board wants to do away with the present method that enables companies to escape balance sheet recognition simply by structuring lease terms of fall outside the definition of a capital lease. FASB has been working with the International Accounting Standards Board for several years to try to created a converged approach to lease accounting.

The board's first approach met with heavy criticism because it produced a “front loading” effect on interest costs, especially for short-term term leases that more closely resembled rental agreements than the financed purchase of an asset. The board issued its second proposal with only four of seven members supporting it, and one of them was former Chairman Leslie Seidman whose term expired soon after the proposal was issued. Her vacant seat was filled by Jim Kroeker, former chief accountant for the Securities and Exchange Commission, who was a member of the SEC staff when the SEC published a lengthy report calling for leases to be brought on to corporate balance sheets.