Last month, the Financial Reporting Executive Committee (FinREC) released its comments on the Financial Accounting Standards Board’s (FASB) exposure draft on leases. The exposure draft is part of a joint project with the International Accounting Standards Board (IASB).
FinREC stated that while it supports the idea of developing a single approach to lease accounting where the assets and liabilities associated with leases are recognized by the lessees, there are fundamental application issues not addressed by the exposure draft.
Primarily, FinREC does not support the lease renewal options and contingent rent aspects of the exposure. The exposure draft approach for lease renewal options suggests a quantitative approach. FinREC believes that a term based on management’s best estimate is a more appropriate approach because the suggested approach requires a level of precision that does not exist and may be more susceptible to manipulation by management, since it is based on probabilities.
Additionally, while FinREC does support including contingent rents and expected payments under residual guarantees in the measurement of assets and liabilities, FinREC believes that this should, again, be based on management’s best estimate, rather than using the expected outcome approach suggested in the exposure draft.
Lastly, FinREC recommended only requiring reassessment of lease liabilities if there are changes in facts or circumstances that indicate a potential significant change in the lease liability.
FinREC also noted that if these matters are not addressed, an additional standard setting will be needed to make the final standard operational.
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