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Start preparing your comments on FASB’s Exposure Draft on Leases October 24, 2010

Posted by Bob Cook in Financial Planning & Analysis, Lease Accounting.
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When FASB and IASB issued their Exposure Draft on the new lease accounting, they solicited comments from interested parties.   Anyone can comment about anything.  Just know, though, that comment letters are posted on the websites of the two accounting boards, and you don’t want to have foolish comments up there for everyone to see.

(As an aside: I don’t know what policies the boards have regarding inappropriate comment letters they get.  Will they post those that are off-topic or those that are obviously uninformed?  And what about those, if any, that are obscene?  Given the outrage shown by some corporate real estate folks, I wouldn’t be surprised if a letter or two shows up with some salty language in it.)

Click here for past posts on the new lease accounting.

Comments due December 15, 2010

December 15th, the due date for comments, isn’t that far away.  While you can comment about anything, the boards have released 19 questions that they’d like comments on.  These range from the conceptual, e.g. “Do you agree that a lessee should recognize a right-of-use asset and a liability to make lease payments?”  (Question 1) to the technical, e.g. “Do you agree that a lessee should present liabilities to make lease payments separately from other financial liabilities?” (Question 12)

What should real estate professionals comment on?

While the accounting boards will accept comments from anyone, including trade organizations and consultants, they are most keen to hear from those who use financial statements and from those who will have to apply the standard to prepare their financial statements.  For the latter, preparing a comment letter will usually be the responsibility of the technical accounting department and corporate real estate people will have to work through it to get their voices heard.

Corporate real estate folks need to understand, though, that many of the questions posed by the accounting boards cannot legitimately be commented upon by anyone who does not have a strong understanding of accounting and its role in facilitating information flow in the business community.   Comments that appear to come from those unschooled in accounting principles are likely to be dismissed.  Corporate real estate folks need to avoid wasting energy making comments that are uninformed.

Also, corporate real estate professionals need to understand that there may be elements of the new accounting that they don’t like but which are based on long standing accounting practice…. and objections to these will likely be considered uninformed and will not sway the boards’ opinioins.  For example, many corporate real estate folks are concerned about how the imputed interest on the lease liability is to be calculated.   The new standard calls for use of the “interest method” (as opposed to something like a straight-line amortization of the total interest charge.)  For sure, this is going to have some painful results in the form of high P&L expense in the early years of the lease… particularly for very long leases.  Nevertheless, it is naïve to expect that a special type of interest accounting should be allowed for leases.  The principle for how to account for imputed interest is already well established and, in fact, is already applied to real estate where capital leases are involved or where FAS 146 reserves have been established.  The boards are not going to allow a new form of calculating imputed interest for leases just because it will be painful.  The present imputed interest methodology is sound.  In fact, conceptually it makes sense for companies to feel a little more P&L pain in the early years of the lease; that’s when they are getting the greatest benefit of controlling an asset far into the future.  The “interest method” of computing interest is an established accounting principle; that’s why the interest calculation is not among the 19 questions that the accounting boards have put forth for comment.  I don’t think it’s up for debate.

The 19 Questions

A good guide as to how to avoid making uninformed comments is to only make comments that respond to one or more of those 19 questions.  The people who work at the boards are pretty smart.  They understand which elements of their proposal cause heartburn and where they might be able to make adjustments without conflicting with existing accounting theory and practice.  They’re actually really interested in hearing suggestions for alternative accounting treatments that can avoid the heartburn, at least as long as the suggestions don’t fly in the face of long-held accounting principles.

Here are links to the Exposure Draft so you can read the 19 questions for yourself.  They appear near the beginning of the Exposure Draft.

Click here for U.S.-based Financial Accounting Standards Board’s (FASB’s) version.

Click here for International Accounting Standards Board’s (IASB’s) version.

In future posts, I’ll provide my thoughts on each of these questions.

Click here for past posts on the new lease accounting.



1. Comments to FASB on Lease Accounting – My Recommendations « Corporate Real Estate Strategy - November 7, 2010

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