The Proposed Lease Accounting Standard – A Lessee Perspective

On August 17, 2010, FASB and the IASB jointly issued a proposal for a new lease accounting standard that would require most leases to be recorded on the balance sheet. The effort is to increase transparency for financial statement users who currently need to look in the footnotes to estimate the impacts of operating leases on the financial statements. Currently, the consensus is the final standard will be released sometime during the second half of 2015, though the effective dates of the new standards are unknown. The following discusses potential implications of the new lease accounting standard, reflective of the FASB and IASB deliberations and decision making efforts through May 2015. FASB staff is currently drafting the new lease accounting standard and the implications below may change, based upon the issuance of the standard in its final form. 

What Is Changing? 

FASB and IASB differ significantly on their approaches to reforming accounting for leases. Currently, FASB is creating its new standard using two lease types, referred to as a Type A Lease (similar to a capital lease) and a Type B Lease (similar to an operating lease). Each lease type would be accounted for and expensed differently, although the total lease related expenses will be equal at the end of the lease term. The IASB’s lease accounting model, which is independent of the FASB’s model, is based on a single lease type with all leases classified as Type A Leases.   

Although the FASB’s new lease accounting standard may have a stronger impact on certain industries (e.g., retail, airline), the standard will affect any industry where long-term leasing (i.e., greater than 12 months) is utilized in financing of new equipment, or other business needs. For such leasing arrangements debt and lease assets will be brought on to the balance sheet, which could have implications to key financial ratios (e.g., leverage, valuation) and potentially affect certain covenant calculations within existing debt agreements.