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Exposure Draft on Lease Accounting Is Delayed … but Companies Can’t Get Lulled into Delaying Response July 6, 2010

Posted by Bob Cook in Financial Planning & Analysis, Lease Accounting, Profession of Corporate Real Estate.
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Addendum:  On August 17, 2010, IASB and FASB issued the Exposure Draft on Leases.  See my post of that date and links to the ED here.

Also, see my other blog posts on the new lease accounting here.

Well… June has come and gone. The IASB and FASB had targeted June for the release of the Exposure Draft on the new lease accounting. It’s not out yet. Both organizations have, in the last week, posted revisions on their websites that state the Exposure Draft will be out in Q3 of this year (instead of Q2) with a comment period to go through Q4 (instead of Q3). See the lease accounting project websites for FASB and IASB.  Also, see FASB’s timeline for all projects.

Why the delay?   The main thrust of the new accounting is aimed at how lessees (aka tenants) should account of their lease obligations. The delay is apparently due to the accounting boards deciding that they needed to get some closure on how accounting for lessors (aka landlords) would work and then finding that the lessor accounting issues were thornier than they originally thought. Observers are guessing that the Exposure Draft will be out either this month or next month.

New lessee accounting is already pretty clear, though.  For those who have been following the accounting board’s deliberations over the last few months, the contents of the Exposure Draft will not be a surprise. In March 2009, the boards issued a Discussion Paper that outlined the overall concept of the new accounting … which requires all leases to be put on the balance sheet … and the notes from the monthly Lease Project meetings that have subsequently been taking place address various details of the accounting and can be viewed on the IASB website. At this point, it is possible to have a pretty good understanding of what will be in the Exposure Draft … at least as it relates to lessee accounting.

Exposure Draft delay will probably not delay the issuance of final standard.  It is important to note that there is no delay expected for the issuance of the Final Standard which is due out by June 2011. Compliance would be due sometime after that. The Effective Date of the standard is not known yet, and during the comment period, corporations are likely to request a long transition period to allow them to put in place the new processes and systems that will be required. The Effective Date on which the accounting will be required will probably be in 2012 or 2013, but it could be later.

Don’t be lulled into delaying response. Many companies are delaying applying resources to respond to the new accounting until the Exposure Draft is out. This is typically how companies approach new accounting standards, and it usually makes sense … but maybe not this time. Here are two reasons why…..

New processes will take time to establish.  First, in order to be able to comply with the new lease accounting standard, companies are going to have to do a lot more work than is usual when a new standard is issued. Most new standards simply require that financial information which is already available be accounted for differently. That only requires an adjustment at the end of the overall accounting process. In the case of the new lease accounting, however, the processes needed to gather and record some of the required information don’t even exist yet in most companies. New processes are going to have to be designed, documented, implemented, tested, and revised prior to the Effective Date. This is a lot of work. Companies that wait too long to get started on this are going to find themselves in a frenzy at the end. (Remember Y2K? Or the initial SOX-compliance?)

Grandfathering is unlikely.  The second reason responding to the new lease accounting should not be delayed is that grandfathering is extremely unlikely. Leases being signed today will probably have to be accounted for under the new lease accounting once the new standards are required. Companies should already be taking the new lease accounting into account when evaluating decisions like length-of-lease or own-vs-lease. Companies that are not already doing so are already behind in addressing the new standard.

Waiting for the Exposure Draft.  While it makes sense to wait for the Exposure Draft to be released before “pulling out all the stops”, getting started now on responding to the new standard would be prudent for most companies. Whatever amount of time will be available between issuance of the Exposure Draft and the Effective Date of the new standards is sure to seem like too little. In order to ease the time crunch that is surely coming, companies should now, at the minimum, mobilize to respond to the new standard by learning more about the standard and by establishing teams and point people to lead the effort ahead. That effort is going to require addressing everything from real estate strategy to new process design to structure of the real estate function.

Tririga Webinars.  I’ve completed a series of webinars, sponsored by Tririga, on “The New Lease Accounting and You”. There I spoke extensively about how the new standards are going to change how corporate real estate is done, how it’s impact will go far beyond how accounting entries are made. If you missed hearing these webinars live, you can register to hear them on-demand on Tririga’s website.

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