Death of the Operating Lease?
The US Financial Accounting Standards Board ("FASB") and the International Accounting Standards Board (IASB) have jointly issued a Discussion Paper on a new accounting model for leases which would result in operating leases being accounted for as capital leases. Under current lease accounting standards, the lessee accounts for a lease classified as a capital lease similar to a purchase, recognizing the asset and the related liability on its financial statements. Whereas, the assets leased under an operating lease are not recognized and the lease payments are expensed. According to the Discussion Paper, critics of current lease accounting standards claim that all leases are just another form of financing, and cite as reason for change the fact that two very similar transactions can be structured just technically different and one will show up on the financial statements of the lessee while the other does not. These undisclosed liabilities, they say, create difficulties for users of financial statements in making reliable comparisons of financial position. The Discussion Paper proposes new principles for lessee accounting (changes in lessor accounting will be considered at a later time) where the lessee of an operating lease would recognize as an asset, the "right-of-use" of the leased asset, and as a liability, its obligation to pay rentals, thus, eliminating the different accounting methods for capital and operating leases.
The Discussion Paper contains preliminary views of the two boards on this project and raises many issues that are not specifically addressed at this time. Comments to the Discussion Paper were to be submitted by July 17, 2009. Undoubtedly, it will be a few years before new standards are in place. However, with most companies having some type of leased assets ? vehicles, equipment, real estate ? thought needs to be had now about the effect of a possibly significant amount of debt suddenly showing up on balance sheets and planning transactions accordingly.
Committee Business
The Article 2A Leasing Subcommittee will next meet at the Business Law Section Spring meeting in Denver, Colorado. We will begin what is sure to be a developing discussion on the above lease accounting changes with leasing industry leaders. Be sure to submit any other topics of interest to either Teresa Davidson or Ruthanne Hammett.
