Over the past few years, the Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB) have been determining a way to best treat leases so that investors and others who use financial statements can get an accurate picture of an entity's financial health.
The accounting industry's two primary governing boards came to the conclusion that uniform treatment for leases would make it easier for investors and others to make more rational investment, credit and other decisions.
Accordingly, on August 17, 2010, the Boards issued a proposed set of rule changes, called an Exposure Draft, governing the accounting for all lease transactions. After much public comment and further deliberations by the Boards, they issued a revised Exposure Draft on May 16, 2013.
Under both Exposure Drafts, most off-balance sheet transactions regarding operating leases, which include most real estate leases, were eliminated. With very limited exceptions, leases would appear on company financial statements as though the company had purchased and then financed the leased asset. This asset would appear on the balance sheet as a "right-of-use" (ROU) asset with a corresponding liability for the rent payments.
The 2013 revision provides for two different treatments on the lessee's income statement depending on the type of lease being reported: Type A or Type B. For Type A Leases, most non-real estate leases, both interest expense associated with the established liability and straight-line depreciation expense of the ROU asset will be reported. For Type B Leases, most real estate leases, only a rent expense will be reported.
As of February 2014, the Boards have begun to re-deliberate all significant issues raised by public comments regarding the revised Exposure Draft. A final pronouncement, at the earliest, is not expected until later in 2014, in which case, the effective date of the changes will be no earlier than 2017, in order to give companies appropriate time to comply with the new rules.
The planned changes to lease accounting have placed a renewed importance on a company's ability to manage and report on their real estate. Once lease information is part of a company's financial statements, corporate officers will be required to certify accuracy of and certify the effectiveness of corporate controls over it. New Jersey leaseholders will now be looking to internal changes when it comes to their data, relying heavily on lease management software products to help manage the intricacies of the new requirements.
Attorney and veteran lease negotiator
Founder and President of Visual Lease
Founder and President of KBA Lease Services