Rule Makers Still Split on Lease Accounting

March 18, 2014, 4:19 PM ET
Rule Makers Still Split on Lease Accounting
EMILY CHASAN
Senior Editor
U.S. and international rule makers remained divided Tuesday in the first of two days of meetings aimed at resolving differences on lease accounting.

The U.S. Financial Accounting Standards Board and London-based International Accounting Standards Board aim to issue a final standard later this year that would move about $2 trillion dollars of lease obligations onto corporate balance sheets. But they are still split on the fundamental model companies should use to measure those liabilities.
“We have been struggling with this standard for many years,” Hans Hoogervorst, chairman of the IASB said at the meeting in Norwalk, Conn. “There is no simple answer.”
The major difference is whether to restrict companies to one method to account for leases, or to let them choose between two. The debate will continue Wednesday.
Since 2005, the Securities and Exchange Commission has recommended an overhaul of lease accounting because large off-the-books lease obligations can obscure a company’s true finances.
Under current rules, lease accounting is based on rigid categories that let companies keep operating leases for items such as airplanes, retail stores, computers and photocopiers off the books, mentioning them only in footnotes. In other cases, where the present value of lease payments represents a very large portion of the asset’s value, they are called capital leases and treated more like debt.
In their efforts to revamp the rules, accounting standard setters have gone back to the drawing board several times. In 2010, they proposed a method aimed at bringing leases on-the-books by categorizing them as “right of use” assets, which would treat them like financings.
Companies pushed back, claiming it would be costly to implement and could unnecessarily front-load lease expenses.
So the rule makers agreed to compromise in 2012 on a two-method approach: The first would let companies treat some leases like financings, such as when a company can purchase the asset at the end of a lease. The second would treat other leases as straight-line expenses, such as rental payments for retail storefronts.
That move also drew criticism from analysts, who were concerned they wouldn’t get comparable financial information because the choice would be left up to companies.
On Tuesday, some board members said they preferred to return to the “right of use” approach because they think the compromise is weak. Others were in favor of the two-method approach because it would be easier to implement.
The dual method approach is the “more operational one, at least initially,” said FASB Vice Chairman Jim Kroeker.
To speed a resolution, the boards also generally agreed to eliminate potential changes to lessor accounting from the proposal.
The boards had received feedback from investors and analysts that the current lessor model works well and that changes could result in more work.
Board members, however, said they wanted to make sure that lessor rules would be aligned with new revenue recognition rules so that companies cannot arbitrage the two in asset sales.

 

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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