WASHINGTON, DC—A key concern for industry firms is the looming changes to how they account for leases. The International Accounting Standards Board and the US Financial Standards Board have worked—or rather, struggled—to converge their two respective lease accounting standards, and so far the proposals have been less than pleasing to the industry.
Now, a new proposal has emerged that could be satisfactory to real estate and other business users, Bill Bosco, a consultant for the Washington, DC-based Equipment Leasing and Finance Association and principal of Leasing 101, tells Real Estate Forum. There are still some hurdles, namely that IASB is reportedly not yet on board, he says. "But this is the proposal we think most of the stakeholders would agree is an acceptable method," he states. "Certainly real estate owners, concerned about what their lease costs will look like, will accept this one as the best of all proposed methods." He estimates that real estate leases comprise 75% to 80% of the dollar volume of operating leases.
This new proposal is called whole contract. It accrues the average rent as the reported lease cost—much the same as current GAAP—and adjusts the lease liability on each balance sheet date to be the present value of the remaining lease payments. "It does not change the P&L or the cash flow presentation for what used to be the operating lease," Bosco says.
Whole contract, or Approach D as it's also called, was added as a fourth possibility after FASB and IASB could not come to an agreement this February on the lessee cost pattern issue. This is considered the most significant unresolved issue holding up the issuance of a new exposure draft.
During the recent RealShare Net Lease conference in New York City, panelist Serena Wolfe, a partner at Ernst & Young's New York office, noted that IASB favors the underlying asset approach, in which a lessee amortizes its right-of-use asset using an interest method. "It's considered by some as a purer method," Wolfe said.
At this stage, "Nobody is sure" where the lease accounting conversation will end up, Wolfe said. "It's going to take a while for the boards to flesh these ideas out more to provide a little bit more color as to how to actually come up with these concepts, but it's an indication that the boards are listening to you, and they are working to create a solution."
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Erika Morphy
Erika Morphy has been writing about commercial real estate at GlobeSt.com for more than ten years, covering the capital markets, the Mid-Atlantic region and national topics. She's a nerd so favorite examples of the former include accounting standards, Basel III and what Congress is brewing.
