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FASB----A giant leap for... www.leasingnotes.
Yes, folks, the step has been taken. Both the FASB and IASB agreed yesterday to undertake a joint project designed to overhaul FAS 13, and, implicitly, IAS 17, the international lease accounting standard. The proposed timetable includes FASB staff research on the scope and implications of the project, followed by Board deliberations during 2007. A Preliminary Views document will be issued and comment will be solicited from interested parties in 2008, with a formal Exposure Draft issued for comment in 2009. If the rabble rousers get their way, all leases will end up on the balance sheet, even though this result goes against every lease accounting standard in the world, along with the civil laws of some countries. Based on the comments, it appears that any revision to FASB 13 may only be a patch that addresses the off balance sheet treatment for lessees, since the Board does not want the complex issues involved in lessor accounting to delay progress on the project. Several members of the FASB Board specifically mentioned that the issue of materiality for small ticket transactions would be taken into account as the Board deliberates, something for which Alta principal and former ELA President Michael Fleming has pushed. The Board has requested that the ELA be represented on the project work group, which the association has agreed to. Apparently, there was unanimous agreement by the FASB that current rules are deficient. According to FASB member Leslie F. Seidman, ".investors are concerned that existing standards do not require balance sheet recognition of significant assets and liabilities arising from leases." There is plenty of press about this issue, also. The Analyst's Accounting Observer weblog, for instance, claims that "it's just a good idea to fix a standard that produces standardly awful results." As the AAO points out, current lease accounting doesn't say much about the future obligations of a company's operating leases, and, although analysts adjust the balance sheet to account for the obligation, it is a haphazard, imperfect exercise. "Investors shouldn't have to jury-rig balance sheets to make them say something when they're dealing with fairly standard transactions." Bold talk, but, although everyone knows it needs fixing, no one has come up with realistic solutions. Furthermore, won't the same reporting problem exist if operating leases go on balance sheet? As Luca Pacioli tells us, if there is a liability there must be an asset. Now what do I do as an investor? The balance sheet shows a bunch of assets, some of which are real and some of which are leasehold interests. The real assets can be converted to cash, but not the leasehold interests. So, now I have to restate the balance sheet from information I will probably get from the footnotes to properly determine the quality of the company's assets. Sound familiar? Oh, how I love lease accounting! Shawn D. Halladay
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