No easy answers in key leases standard debate

No easy answers in key leases standard debate
BY KEN TYSIAC
MARCH 18, 2014
FASB and the International Accounting Standards Board (IASB) are struggling to find common ground in their efforts to create a converged standard for financial reporting on leases.

While meeting together Tuesday at FASB’s headquarters in Norwalk, Conn., the two boards came to different conclusions in preliminary votes on financial reporting guidance for lessees and for lessors.
The boards will meet again Wednesday in an effort to resolve their differences and move forward together with the difficult project, which was first placed on their agendas in 2006. They are trying to create international comparability on financial statements by placing leases on the balance sheet.
“We have been struggling with this standard for many years, for two reasons, I think,” IASB Chairman Hans Hoogervorst said. “First of all, because it’s very controversial. Many companies simply don’t like this stuff on the balance sheet. And secondly, because it’s also intellectually challenging. And I agree with all those who say there is no simple answer, and it’s a unique asset and liability that we’re talking about. It’s not easy to find the right answer.”
The boards did not come to the same answer on either lessee or lessor accounting Tuesday.
Lessee accounting
FASB and the IASB issued their second exposure draft in 2013. That document proposed a dual-reporting model for lessees. The proposal would have required lessees to classify their leases as Type A when a more-than-insignificant amount of the value of the asset is consumed during the lease period. That would have included most equipment and vehicle leases. Type B leases would have been those during which an insignificant amount of the value of the asset is consumed, such as most property leases.
But the 2013 exposure draft received overwhelmingly negative responses from preparers and questions from some financial statement users about the relevance of the information the proposed standard would produce. So FASB and the IASB are reconsidering their options.
With regard to lessee accounting, IASB members on Tuesday favored requiring lessees to account for all leases as Type A leases—recognizing amortization of the right-of-use asset separately from the interest on the lease liability.
FASB members supported a dual approach that would determine lease classification in accordance with the principle in existing lease requirements, which hinge on whether a lease is effectively an installment purchase by the lessee. Under this approach, the vast majority of capital leases for U.S. GAAP preparers and finance leases for IFRS preparers would be accounted for as Type A leases by lessees. The vast majority of existing operating leases would be Type B leases.
FASB member Daryl Buck said that approach is the simplest and most direct answer to the project objective of recording lease liabilities in the least disruptive way possible.
But Hoogervorst said the all-Type A approach is the most conceptually sound model.
“When we made the suboptimal choice of the dual model in the previous exposure draft, all the people who didn’t like the standard immediately started swarming to the conceptual weakness of this dual model,” Hoogervorst said. “I have come to the conclusion that if we want to get this through, we have to be as conceptually sound as possible.”
Lessor accounting
With regard to lessor accounting, the IASB members supported “Approach 1,” which would require lessors to classify leases as Type A or Type B based on whether the lease is effectively a financing or a sale. The lessor would make that determination by assessing whether the lessor transfers substantially all the risks and rewards incidental to ownership of the underlying asset.
FASB members supported “Approach 2,” which would use the same criteria as Approach 1 to distinguish between Type A and Type B leases, but would preclude recognition of selling profit and revenue at lease commencement for any Type A lease that does not transfer control of the underlying asset to the lessee, consistent with the requirements for a sale in the boards’ soon-to-be issued, converged revenue recognition standard.
Despite the disagreement, the boards will try again to find a common answer.
“I wanted to have a dialogue again about the difference on lessee accounting, to see if we can build some solutions,” FASB Chairman Russell Golden said after the boards failed to agree on lessor accounting. “It sounds like we can bring this up … as well to see if there’s any ability to move to come to a converged solution.”

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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