OUR THOUGHTS ON:

Lease Accounting Simplification

Construction

By Eugene DeFrank

The Financial Accounting Standards Board (FASB) and International Accounting Standards Board (IASB) (collectively, “Boards “) have been extremely busy addressing the many comments provided to the Leases exposure draft. In fact, the Leases topic was on the agenda for numerous joint meetings of the Boards during the month of March 2011. Most noteworthy was the Boards’ agreement to simplify their proposed accounting for short-term leases for both lessees and lessors. This simplification will apply to many organizations since short-term leases are prevalent in the marketplace. 

Significantly, the Boards tentatively decided:

  1. A short-term lease, for both lessees and lessors, is defined as: 

    A lease that, at the date of commencement of the lease, has a maximum possible term, including any options to renew, of 12 months or less 

     

  2. Lessees and lessors may elect, as an accounting policy for a class of underlying assets, to account for all short-term leases by recognizing lease payments in profit or loss on a straight-line basis over the lease term (unless another systematic and rational basis is more representative of the time pattern in which use is derived from the underlying asset class), as opposed to recognizing lease assets and lease liabilities.

Other topics addressed by the Boards in March 2011 relative to Leases included:

  1. Accounting for purchase options
  2. Date of inception vs. date of commencement
  3. Defining and accounting for initial direct costs
  4. Discount rate used to initially measure lease payments at present value
  5. Separating lease and non-lease components of a contract
  6. Sale and leaseback transactions

The Boards will continue their redeliberations of the Leases exposure draft in April 2011. Stay tuned!

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This advice is not intended or written to be used for, and it cannot be used for, the purpose of avoiding any federal tax penalties that may be imposed, or for promoting, marketing or recommending to another person, any tax-related matter.

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