Leases Research Paper

2. Date Project Updated: Lease accounting has been under revision for the past few years by the FASB and the IASB. The FASBs site when I was finishing up finding the information I needed indicated that the site was last updated on March 28, 2014; however, the most recent exposure document related to leases was dated May 16, 2013.

4. Due Process Documents: There are three main documents that the FASB has published in relation to this topic that are there for the publics information and use. The first document is the revised exposure document that describes why they are revising the current models and what they are being revised to. It also asks readers to add their thoughts and comments for the boards consideration and deliberation. The second document is a press release that notifies the public that there have been changes proposed and why they have been proposed. It also gives information pertaining to how the proposal will be addressed and how you can provide feedback if you would like. The third document is called the FAQ document and provides important facts and answers to common questions that may arise about the topic that is in the revision process. There are other documents available just under these that may contain other pertinent information about the lease standard revision. These are a copy of the IASBs exposure draft that is similar to the draft by the FASB, brief summaries of the project (In Focus (FASB) and Snapshot (IASB)), and finally the comment letters (FASB) and feedback summary (IASB) which are the thoughts of other professionals in the fields and industries that will be affected by this change. All of these are available for viewing in connection with the three documents above to help the public get the best understanding they can of the progress on the lease project. This section of the exposure draft is in two parts. The first is a simplified explanation of what the exposure document is about by answering common questions about the topic. The second section is questions the FASB and IASB, who are reviewing the issue, would like feedback on to help them in obtaining the best standards to implement. It starts off by first asking and then answering the question, Why is the FASB issuing the proposed accounting standard update? They first explain that leases have become a major part of many business and that the current model we have in place to account for them is insufficient in the giving the best economic representation of the company to the users of the financial statements. Over the last few decades financial investors have felt that companies who lease items, whether the lessee or lessor, are not providing enough information about how the lease transaction affects the company in their financial statements. This concern has been under discussion by the FASB since 2010 and is a joint project between the FASB and IASB. The purpose of the project is to alter how leases are accounted for and help investors by more fairly representing lease agreements in financial statements. The two organizations have issued two drafts of exposure. The first was issued in 2010 and they accepted comments and concerns on the

solutions they had decided on. A revised draft that included many changes was then issued in May of 2013 and the public was allowed to submit comments on that draft before September 2013. These comments and opinions have been and still are being addressed at a joint meetings of the two organizations. Many of the problems with lease accounting stem from how lessees account for operating leases. However, the organizations felt that it would be necessary to redo the accounting of leases from both sides to keep the standards consistent. The next question they address is, Who would be affected by the amendments in the proposed update? The answer to this question is any entity that enters into a lease. This amendment will supersede the current IAS 17 and the requirements of Topic 840 in the FASB codification. The topic of how the new provisions are different from GAAP and why they are necessary is addressed next. The new provisions state that an entity should recognize assets and liabilities arising from a lease. (Revised Exposure Draft) This is an improvement because in the existing codification it is not a requirement to do so. Under the new laws a lessee will recognize any asset or liability that they have for more than twelve months along with other criteria that will be considered. Both the lessee and the lessor will have their own way of determining and accounting for the two new types of leases. As a lessee they will need to determine if their use of the asset would be more than an insignificant portion of the economic life of the asset. This means that if they are going to get the most benefit from the asset, they need to recognize all the cash flows and expenses related to the asset. To help in determining what type of lease it is the FASB and IASB have reclassified leases into two categories and there are directions for each type that the lessee or lessor can follow. Type A leases are leases of assets other than property, such as machinery, equipment, vehicles etc. As a lessee they would be required to recognize the right of use of the asset and a lease liability. They will also need to recognize the unwinding of the discount given on the lease as interest separately from the amortization of the right of use. As a lessor they would derecognize the asset on their books and recognize a right to receive payment. They too would recognize the unwinding of the discount as interest income as well as recognize any profit from the lease at the start date of the lease. Type B leases are the lease of property or buildings. Type B leases would require the lessee to once again recognize the right of use of the asset and a liability. However, for these leases the right of use and the discount on the lease would not be separately stated but would be considered one cost. For the lessor they would continue to recognize the asset on their books and recognize the lease income over the life of the lease. A few more details to help each the lessee and lessor in determining what type of lease they are accounting for are that they must exclude most variable lease payments unless special circumstances are met. Another is that each entity will also have the ability, for leases less than twelve months, to choose the option of a method similar to the one currently in place for operating leases. Entities will also be required to make disclosures about the leases that allow users of the financial statements to understand the amounts, timing and cash flows that occur from the leases. Accounting for leveraged leases current method will be eliminated and replaced

by the steps provided above for the lessor, and will be implemented for all current leveraged leases.

When the new provisions are put into place all current leases will be modified through a moderate to full retrospective approach to determine the value of the leases. They will then be reported in the earliest period possible. The next topic of discussion is when the amendment will take effect. According to the draft exposure it will become effective as soon as they have considered the feedback received on the revised disclosure. They also note that they know this is a large change and will affect many companies, so they will consider that in their decision of an effective date. Next they compare the differences between the FASBs version and IASBs. The drafts they are currently using are almost identical to one another and there are only five major differences. These differences come in the areas of revaluations, statement of cash flows, disclosure, nonpublic entities, and existing differences in IFRS and GAAP that affect lease accounting. The second section of the article gives specific questions the boards want the public and professionals to consider and respond to as they read the draft. They want to know what the people who will be required to implement the new provisions think about the proposed changes. The responses they receive should help them in determining the best possible way to account for leases by identifying weaknesses or aspects they may have overlooked. The first two topics they want to address is the scope of the structure and the new accounting models. They ask several different questions that include: Do you agree with how a lease has been defined? Do you agree with how lessee and lessors will be required to account for leases under the new proposals? Why or Why not? Next they ask questions that address many of the complications they will face in implementing the new proposal for lease accounting. They ask questions concerning the topics of lease term, variable lease payments, transition, disclosure, and treatment of leases by nonpublic entities. They then address the topic of related party leases and ask questions concerning the challenges that will be faced there. The topic of related parties is only addressed by the FASB. The final question only relates to the IASB and discusses how the amendment of this section will lead to necessary amendments in other sections that are related to leases or similar to leases, such as accounting for investment property. 6. Most Recent Decisions: At the most recent board meeting that happened earlier this month the board covered six major topics and came to a few decisions regarding some of them, others will continue to be reviewed in future meetings. The first decision they came to is that for FASB there will be a dual approach from the lessee side in determining what type of lease it is and IASB will continue to have a single approach. The next decision they made relates to the lessor and how they will determine between type A and B on the basis of whether the lease is a sale or a financing lease. For the lessor type A approach both boards have decided to eliminate the receivable and residual approach introduced in the May 2013 draft and replace it with an approach that is similar to those already in place for the lessor under the current GAAP and IFRS for all type A leases. The

topic of lessee small ticket leases was resolved and there is no specific requirements on materiality. Along with this each board has provided guidance on how to apply this standard at the portfolio level by both the lessee and lessor. For the topic of lease term the boards decided that all relevant factors that create an economic incentive related to the lease should be considered when options, such as, extensions or terminations are involved. They also concluded that the lessee can only reassess the term of the lease if significant events or circumstances that are within their power change. The lessor, however, cannot reassess the lease term. In the area of short-term leases they have retained the recognition and exemption model and the final decision addressed that there should be disclosure of expense amounts for short-term leases in the financial statements.

References
"FASB.org." 28 March 2014. <http://www.fasb.org/cs/ContentServer?c=Document_C&pagename=FASB%2FDocument_C%2F DocumentPage&cid=1176162613656>.