Lease Accounting Project Update

Lessor Accounting has been finalized.

• The FASB/IASB Boards have adopted a single method for lessor accounting called the Receivable & Residual (“R&R”) method, a direct-finance-like model including limited sales-type profits (residual portion deferred) for all but short-term leases and investment properties.
• Leveraged leases have been killed.
• Lessee disclosures and presentation have been defined.
• Variable payments based on rate or index are booked at spot rate, but are adjusted when changes in index or rate occur.

Executive Summary of Total Project

Time Line

Target is before year-end 2011 for a new exposure draft with a 120-day comment period. This means the new rules will not be issued until mid-2012. The transition date is 2015.

Lessee Accounting

• Capitalize all leases at the present value (“PV”) of estimated payments;
• P&L pattern will be front-ended ' rent expense replaced by amortization and imputed interest;
• Lease term is substantially the same as the current GAAP definition;
• Variable rents based on a rate (i.e., Libor) or an index (i.e., CPI) are booked based on spot rates with review and adjustment at every reporting date. Variable rents based on usage or lessee performance (e.g., sales) not booked unless considered a tool to avoid capitalization (disguised minimum lease payment). Estimated payments under residual guarantees are booked with review and adjustment at each reporting date;
• Short-term leases use operating lease method with additional disclosure regarding expectations of future use of short-term leases.

Lessor Accounting

• Three methods approved: “Receivable & Residual” method (much like current GAAP direct-finance lease method), short-term lease (current GAAP operating lease method), and investment properties measured at fair value for qualifying real estate leases;
• Equipment leases will generally use the R&R method (direct-finance-like method);
• Under the R&R method assets are the PV of the receivable and a plugged residual, upfront sales-type gross profits are limited with residual portion of gain deferred until resolved and the residual is accreted. Profits must be “reasonably assured” (and they are in virtually all equipment leases) to record the gross profit upfront;
• Leveraged lease accounting is eliminated with no grandfathering. This is a FASB only issue. New leveraged leases may be allowed offsetting of the rent and debt service (TBD). The Boards will not allow tax affected revenue recognition for any lease;
• Short-term leases use operating lease method.

Bill Bosco, a member of this newsletter's Board of Editors, is the president of Leasing 101, a lease consulting company. He can be reached at 914-522-3233. His website is www.leasing-101.com.

Lessor Accounting has been finalized.

• The FASB/IASB Boards have adopted a single method for lessor accounting called the Receivable & Residual (“R&R”) method, a direct-finance-like model including limited sales-type profits (residual portion deferred) for all but short-term leases and investment properties.
• Leveraged leases have been killed.
• Lessee disclosures and presentation have been defined.
• Variable payments based on rate or index are booked at spot rate, but are adjusted when changes in index or rate occur.

Executive Summary of Total Project

Time Line

Target is before year-end 2011 for a new exposure draft with a 120-day comment period. This means the new rules will not be issued until mid-2012. The transition date is 2015.

Lessee Accounting

• Capitalize all leases at the present value (“PV”) of estimated payments;
• P&L pattern will be front-ended ' rent expense replaced by amortization and imputed interest;
• Lease term is substantially the same as the current GAAP definition;
• Variable rents based on a rate (i.e., Libor) or an index (i.e., CPI) are booked based on spot rates with review and adjustment at every reporting date. Variable rents based on usage or lessee performance (e.g., sales) not booked unless considered a tool to avoid capitalization (disguised minimum lease payment). Estimated payments under residual guarantees are booked with review and adjustment at each reporting date;
• Short-term leases use operating lease method with additional disclosure regarding expectations of future use of short-term leases.

Lessor Accounting

• Three methods approved: “Receivable & Residual” method (much like current GAAP direct-finance lease method), short-term lease (current GAAP operating lease method), and investment properties measured at fair value for qualifying real estate leases;
• Equipment leases will generally use the R&R method (direct-finance-like method);
• Under the R&R method assets are the PV of the receivable and a plugged residual, upfront sales-type gross profits are limited with residual portion of gain deferred until resolved and the residual is accreted. Profits must be “reasonably assured” (and they are in virtually all equipment leases) to record the gross profit upfront;
• Leveraged lease accounting is eliminated with no grandfathering. This is a FASB only issue. New leveraged leases may be allowed offsetting of the rent and debt service (TBD). The Boards will not allow tax affected revenue recognition for any lease;
• Short-term leases use operating lease method.

Bill Bosco, a member of this newsletter's Board of Editors, is the president of Leasing 101, a lease consulting company. He can be reached at 914-522-3233. His website is www.leasing-101.com.