Update on Leases
By Theresa Hickman-Oracle on Mar 05, 2012
I was skimming my various news articles and found an article from Accounting Today on the topic of leases. It seems FASB and IASB are not on the same page regarding income statement changes for leases.
On Wednesday, February 29, in London, the IASB and the FASB each voted for different income statement models on Leasing. Both boards’ decisions result in the same expense curves over time (flat for real estate, front-loaded for gear). However, FASB’s is based on an “interest-based amortization method,” under which leases that transfer substantially all of the risks and rewards of the risked asset would be accounted for under a right of use model. IASB’s is based on “underlying asset values,” which would recognize leases on the balance sheet at the present value of the expected lease payments, just like the FASB, but the right of use asset would be amortized based on the estimated consumption of the value of the underlying lease asset. In other words, companies would need to devise a formula for the estimated percentage of consumption and then apply that to the fair value of the underlying asset to represent the lease expense in any period. The higher the estimated rate of consumption, the more the income statement looks like a purchase and a financing, similar to owning, but it’s proportionate. The lower the rate of consumption, the more the income statement effects would resemble a straight-line pattern. Leslie Seidman, FASB Chair, says no worries, we’ll work it out. Seidman does not believe the disagreement with IASB will greatly delay their already delayed project on leasing standards. She said. “To me that is not a material delay.”
Oracle has been closely following the Accounting Convergence projects initiated by the boards of FASB and IASB since the inception in 2002. Oracle is also an active member of the IT Company Discussion Group.
One of the key projects is to synchronize the accounting standards for Leases across US GAAP and IAS. The stated objective is to bring all assets and liabilities relating to the lease onto the balance sheets for lessors, lessees, landlords and tenants.
This proposed change could impact Oracle’s customers who engage in providing leases to their customers (Captive Lessors, Bank Lessors, Independent Lessors, Commercial or Retail Landlords) or those who use assets through a lease arrangement (Equipment Lessees, Commercial or Retail Tenants). The products in Oracle’s E-Business Suite we have identified for analyzing the impact of the proposed standards are Oracle Lease & Finance Management (for equipment lessors), Oracle Assets / Oracle Payables (for equipment lessees) and Oracle Property Manager (for real estate landlords and tenants).
An exposure draft for Lease Accounting was issued in 2010. Currently the boards are deliberating on the feedback received. The boards plan to issue a revised exposure draft in the summer of 2012.
Oracle has been working with many customers in various industries (e.g., financial services, restaurants, insurance companies, and telecommunications) and sharing our updates with them from Oracle Development on Lease Accounting Convergence.