More than a year after the Financial Accounting Standards Board published it final standard on lease accounting, Deloitte says it’s hearing enough questions about how to apply the new rules it decided to publish a question-and-answer paper to articulate its views.
In the 59-page Q&A, Deloitte describes where it hears uncertainty over how to apply the new rules and its perspectives how how those uncertainties should be addressed. It also points out uncertainties for which even the best thinkers on the subjective have not come to clear resolution of what companies should do.
The Q&A covers the definition of a lease — yes, there are still questions around how a lease is defined — along with issues such as the model for lessees vs. lessors, how leases are classified, the key components or “ingredients” of the lease model, presentation and disclosure issues, and how to transition to the new guidance.
After years of developing the new rules, FASB published the final lease standard in February 2016 to require all entities to reflect leased assets and their related liabilities on the face of balance sheets rather than simply in footnote disclosures. The new accounting brings new rigor to lease management and contract analysis to give investors greater visibility into the financial impact of lease obligations.
With companies already facing a mountain of work to adopt massive new requirements around revenue recognition in 2018, FASB gave companies a long lead time to prepare for the new lease rules, setting the effective date for public companies at 2019. Experts believe ompanies have been slow to pick up on implementation efforts for leasing, largely due to revenue recognition preparations. Even at that, questions about the new standard have emerged early, and some issues continue to remain uncertain, Deloitte says.
FASB and the International Accounting Standards Board formed a Transition Resource Group to vet implementation questions for the revenue recognition standard, which led to a handful of clarifications and technical corrections to the original standard in the United States. FASB also formed a similar group to take questions on the new credit impairment standard, but no such group exists for the lease standard.
Deloitte’s Q&A provides what the firm believes to be definitive answers around questions like whether a lessee can use an appropriate capitalization threshold when evaluating the requirement to recognize leases on the balance sheet. (Spoiler alert: the answer is “yes.”) It also explores whether an entity needs to evaluate service agreements in search of lease arrangements. The answer there is also “yes.”
Does an entity need to consider tax attributes associated with the ownership of an underlying asset when evaluating right of use for a leased asset? No. But secondary use arrangements present plenty of questions, many of which remain uncertain, the Q&A explains.
The poster-child example of a secondary use question is how a company treats its right to post advertising on the side of a building. The building itself may be leased by some other entity, so the right to post advertising on the side of it would represent a secondary use. Accountants are puzzling over how to treat such arrangements under the new standard.
Deloitte explores a number of technical questions companies can explore to help them determine what they should do, but acknowledges the issues are not set in stone. “This issue continues to evolve, and it is possible that the FASB and (Securities and Exchange Commission) will want to share perspectives before any related implementation guidance is finalized,” Deloitte says. “Companies that are involved in these types of arrangements should consult with their accounting advisers and monitor developments on the topic.”