FINANCIAL WATCH By Bill Bosco New Lease Accounting Rules Come Into View A The list of most impacted companies includes retailers, airlines, rail and truck transportation companies, parcel delivery companies and banks. fter years of work, the lease accounting project is nearing completion. Over the summer the Financial Accounting Standards Board (FASB) and International Accounting Standards Board (IASB) issued “fatal flaw” drafts of the new standard to selected organizations for final comments. We understand that there were no surprises in the “fatal flaw” drafts, which largely matched the outlines of decisions made to date and posted on the FASB and IASB websites. The Boards appear to be on track to sign and issue the new standard by year end 2015, with a possible effective date of 2018. and liabilities created by leases making it impossible for users to know the break down. Because the operating lease liability is therefore considered debt, debt covenants will be violated. Because the ROU assets from operating leases are combined with finance lease assets, bank regulators will not have the information to grant capital relief for operating leases as they do now since operating leases are executory contracts that are voided in bankruptcy. What’s Expected in the New Rules The new rules will dramatically change the way leases are accounted for by lessees. The rules will impact the balance sheets of every company, U.S. or IFRS based, that must pro-duce audited financial statements subject to Generally Ac-cepted Accounting Principles (GAAP). The companies most impacted will be those that lease real estate and large ticket assets. The list of most impacted companies includes retail-ers, airlines, rail and truck transportation companies, parcel delivery companies and banks. The P&L of U.S. firms will not be impacted, while the P&L and capital of IFRS com-panies will be negatively impacted due to the front loading of lease costs for the former operating lease under the IASB one-lease model. The Boards will issue separate standards with major differences in lessee accounting but with lessor accounting substantially converged, as they adopted existing GAAP for lessors with few changes. One difference in the versions of lessor accounting is the decision by FASB to incorporate con-cepts from the new revenue recognition standard for deter-mining when a sale takes place in sales type leases and sale leasebacks, whereas the IASB did not. Lessor Classification As for lessor classification, both Boards agreed to retain their respective lessor models. IASB lessors will look to the IAS 17 model for classification while the FASB will retain their FAS 13 model with minor changes. Overall the decision is viewed as good news because it means lessors can continue to use their current lessor accounting systems. Operational Impacts Lessees, especially if they have large operating lease port-folios, should read the outlines posted on the Boards’ websites, as capturing the data will be a large undertaking under the new rules. Lessees with many leases will need to acquire a system to account for their capitalized operating leases. The will need to capture information for all leases existing on the transition date and load the information to produce the necessary comparative statements. In the Unit-ed States, required financial statements for SEC registered FASB’s Model The FASB has agreed with the position of many preparers and users, including ELFA, on critical recognition and fi-nancial reporting matters. They are maintaining a two-lease model where some leases are classified as financed purchases of the underlying asset (Type A leases) while others are clas-sified as operating leases (Type B leases) when they merely are the acquisition of a temporary right to use an asset for a part of its useful life. IASB’s Model In contrast, the IASB decided on a single-model approach. In this approach, lessees would account for all leases (other than short-term leases and small value asset leases) as finance leases that feature a front-loaded expense profile due to the combination of the imputed interest component (a declin-ing cost pattern) and straight-line asset amortization compo-nents of the lease cost. The costs in the income statement will be presented as interest expense and amortization expense. They also combine the presentation of the leased ROU assets 52 OCTOBER 2015 EQUIPMENT LEASING & FINANCE MAGAZINE Don’t miss the session “Strategies for Success in the New Lease Accounting World” at the 2015 ELFA Annual Convention. Learn more at www.elfaonline.org/AC.