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What will happen to my operating lease once the new IASB rules come in in 2016? Will the full value of the asset transfer as a liability to my balance sheet, or only the remaining payments?

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Anonymous
(Agent, JKS Solutions, Inc.) |

Its too early to tell.

Here is the link to the notes through 10/23/2012 at FASB.org
http://www.fasb.org/cs/ContentServer?c=FASBContent_C&pagename=FASB%2FFASBContent_C%2FProjectUpdatePage&cid=900000011123

Earlier in 2012 both the IASB and FASB decided they both needed to go back and work to improve both sides of the discussion. The exposure draft will be reexposed in the 1st Q of 2013 according to this information. Click the link at this page with the * and it will take you to the recent update section and you can review the important areas.

I think the result will be a balance sheeting of operating leases that have lease terms longer than one year, but that is a guess.

There will be a time value of money factor that you will need to take into account such as present value. They will not allow you to capitalize the cash value of remaining payments and you would not want to because that amount is higher than the NPV anyway. Will still have to wait and see.

Topic Expert
Sunil Thukral
Title: Controller/Technical Accounting Advisory..
Company: Consultant
(Controller/Technical Accounting Advisory/ SEC Reporting, Consultant) |

Thanks Val for the comments. At a high level, the following model is currently being proposed, however, you will have to wait and see for the final rules.

If you are the lessee in an operating lease, you will record the various transactions as follows:

1. Determine all the future payments and apply a discount factor to determine the present value. [Note - The discounting is only expected to apply to leases which are greater than one year to make it less burdensome on the companies.]

2. Record the present value determined in Step 1 as an asset and liability on the balance sheet.

3. Each year, the asset will be INCREASED with the amount of the discount factor originally applied, in Step 1.

4. Each year, the asset will be DECREASED by the annual rental cash payments.

With the above transactions, all the operating leases will come on the balance sheet, that will impact many of the debt covenant and other ratios.

Hope the above helps, please feel free to contact me with any additional questions at "Sunil.CPA [dot] CFAatgmail [dot] com"

Anonymous
(Agent, JKS Solutions, Inc.) |

Yay Sunil is here. He is amazing.

Mollie Mossman
Title: CPA CMA MBA & CRE Broker
Company: Future World Corporation
(CPA CMA MBA & CRE Broker, Future World Corporation) |

- Thanks for the authoritative link Valerie and the response Sunil - that's the gist of it.

So what does this mean for businesses, especially those with large fleets and/or commercial real estate portfolios?

Fortunately I've just participated in a discussion of this topic with partners from one of the big 4 accounting firms.

And, as a Commercial Real Estate broker, MBA and a CPA & CMA, I have a unique interest in the topic from accounting, management and business strategy perspectives.

With regard to implementation, there is the need to be on top of the timing, cost and process aspects.

As to timing, one of the rather nuanced but important take-aways at the meeting was that a new FASB chairman would be coming on board mid 2013. (See http://goingconcern.com/post/update-who-wants-be-next-fasb-chair )

So, if you think about the exposure draft going back out in early 2013 and then the new chairman coming on board in the second half, you can see that the project may take the same or an entirely new direction depending on the new chairman's view of the project and it's importance relative to other FASB/IASB topic areas. One could argue that because of the changing chairman there is likely to be further delay in implementation.

I'm therefore advising clients to place concerns regarding lease accounting on the back burner for now, but keep it in view if evaluating new technology solutions for current lease asset accounting. Fortunately, most lease accounting software packages are developing capabilities to accommodate the eventual rule changes, and the delay in implementation should alleviate any gap in availability of technology solutions.

Another interesting take away was that when looking at actual before and after computations, there are circumstances where the differences in the accounting methods have a non-material financial impact. However, one has to go through the computations to determine this!

This means that whenever the rules are implemented, additional costs will be incurred to make the new quantitative computations and new processes established for the more subjective decisions (such as to what proportion the lease is to the economic life of the asset is).Only then will companies see what effect if any the new rules will have on financial statements. Accounting firms may need dedicated lease accounting specialists, and businesses will need to put additional data accumulation into the process.

Finally, as a commercial real estate broker and business strategist, a review of the overall real estate strategy (and other leased assets - fleet, etc.) may be needed for those companies with large lease portfolios. Upon analysis they may benefit from a different approach. I've completed an assignment recently for a national company with millions of square feet of space and they may benefit from restructuring their real estate approach from lessee to owner. Not all companies are in this position, but it's not too early to start asking the bigger questions since long term leases entered into now will be around if and when the new rules go into effect.

Let me know what you think, I can be reached at mollieatmossman [dot] biz

Mollie Mossman, CPA, CMA, MBA & Commercial Real Estate Broker located in the Dallas/Fort Worth, Texas area serving clients with regional or national real estate brokerage needs, CFO services, and strategic planning.

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