As the end of the comment period draws near for the FASB's latest lease accounting proposal, many companies have already begun to analyze the potential impact on their operations. This proposal would make fundamental changes in the accounting for leases. Even though some details are controversial and may be fine-tuned before the new standard is finalized, companies are studying the proposal as it stands now because it is expected to have significant business as well as accounting implications. The effects are far-reaching because leasing is a prevalent business practice. Owners and managers of companies in just about all industries look to lease arrangements as a useful way to gain access to assets, obtain financing, and reduce their exposure to the risks associated with ownership of assets. To help companies sort through the details of the FASB's 339-page proposal, this MHM Messenger provides a brief overview of a general assessment approach. Also see our companion piece that answers many frequently asked questions (FAQs) about this topic.

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As the end of the comment period draws near for
the FASB’s latest lease accounting proposal, many
companies have already begun to analyze the potential
impact on their operations. This proposal would make
fundamental changes in the accounting for leases.
Even though some details are controversial and may
be fine-tuned before the new standard is finalized,
companies are studying the proposal as it stands now
because it is expected to have significant business
as well as accounting implications. The effects are
far-reaching because leasing is a prevalent business
practice. Owners and managers of companies in just
about all industries look to lease arrangements as a
useful way to gain access to assets, obtain financing,
and reduce their exposure to the risks associated with
ownership of assets.
To help companies sort through the details of the
FASB’s 339-page proposal, this MHM Messenger
provides a brief overview of a general assessment
approach. Also see our companion piece that answers
many frequently asked questions (FAQs) about this
topic.
Assessing the potential impact
While no single set of questions will work for every
company, the following questions typically are key to
a thoughtful and thorough assessment of the potential
September 2013
FASB’s 2013 Proposal on Lease Accounting:
Why and How Companies Should Analyze the Potential Impact
impact of the proposal. In effect, each question is a
step in the analytical process.
1. Which of our current agreements fall within the
scope of the proposed guidance and meet the
definition of a lease?
2. How would the application of the proposed
guidance effect our financial statements, including
the income statement and the balance sheet?
3. Would the effects of the differences between the
proposed guidance and the current guidance
have any regulatory or tax implications for our
company?
4. Would the proposed guidance require any changes
in our processes, systems or controls?
5. What would we do differently, if this proposed
guidance were to be adopted? Would the proposed
guidance prompt any changes in strategy, such as
lease-vs.-buy decisions?
The analysis of the impact requires knowledge of the
guidance in the proposal and judgment in applying
the guidance, particularly in the areas that represent
changes from current accounting standards. Our
FASB’s 2013 Proposal on Accounting for Leases FAQs
provide a brief overview of the proposed accounting
guidance, highlight some of the key changes, and
identify areas in which questions are likely to arise
when assessing the impact of the proposal.

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In addition to reading the FAQs, companies may wish
to consult with their accounting firms. Keep in mind
that the effects of the lease accounting proposal are
not limited to the financial statements.
Providing comments to the FASB
As companies assess the impact, they may find that
parts of the proposal need clarification or they may
identify areas where alternative guidance may work
better. The FASB is seeking comments on some of
the basic building blocks of the proposed approach,
including the following:
• Definition of a lease. Do you agree with the
definition of a lease and the proposed requirements
for determining whether a contract contains a
lease? If not, how would you define a lease?
• Lessee accounting. Do you agree that the
recognition, measurement, and presentation of
expenses and cash flows arising from a lease
should differ for different leases, depending on
whether the lessee is expected to consume more
than an insignificant portion of the economic
benefits embedded in the underlying asset? If not,
what alternative approach would you propose?
• Lessor accounting. Do you agree that a lessor
should apply a different accounting approach to
different leases, depending on whether the lessee
is expected to consume more than an insignificant
portion of the economic benefits embedded in the
underlying asset? If not, what alternative approach
would you propose?
• Classification of leases. Do you agree with
dividing leases into property and non-property as
a way of differentiating between leases in which
the lessee is expected to consume more than
an insignificant portion of the economic benefits
embedded in the underlying asset? If not, what
alternative approach would you propose?
• Lease term. Do you agree with the proposals
on lease term, including the reassessment of the
lease term if there is a change in relevant factors?
If not, how do you propose that a lessee and a
lessor should determine the lease term and why?
• Variable lease payments. Do you agree with the
proposals on the measurement of variable lease
payments, including reassessment? If not, how
do you propose that a lessee and a lessor should
account for variable lease payments?
• Transition. Do you agree with the proposed
transition requirements that would require a
lessee and a lessor to recognize and measure
leases at the beginning of the earliest period
presented using either a modified retrospective
approach or a full retrospective approach? If not,
what transition approach would you propose?
• Disclosure. Do you agree with the proposed
disclosure requirements? If not, what changes
would you propose?
• Nonpublic entities. Do you agree with the
concessions for nonpublic entities? If not, what
changes would you propose?
• Related party leases. Do you agree that it is
not necessary to provide different recognition
and measurement requirements for leases with
related parties? If not, how would you change the
requirements for related party leases?
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The information in this MHM Messenger is a brief summary and may not include all the details relevant to your situation.
Please contact your MHM service provider to further discuss the impact on your financial statements.
Why your views matter
The FASB’s proposal is controversial, and the
Board will be listening to feedback from accounting
practitioners and their clients. The main reasons
for the changes are to create a single worldwide
standard and to make the accounting more useful for
users of financial statements by addressing several
longstandingcriticismsofcurrentaccountingguidance.
As explained in our related FAQs document, these
criticisms include the off-balance sheet treatment for
most leased assets and liabilities, as well as several
areas in which disclosures are seen as insufficient.
These areas include information related to operating
leases in the financial statements of lessees and
reporting of residual values of equipment and vehicles
in the financial statements of lessors. There is general
agreement on the objectives. But some of the details
of the proposed changes have been difficult to work
out.
As it stands now, the overall impact is controversial
among accounting practitioners, companies, and even
FASB members. Three of the seven FASB members
voted against the proposal and presented alternative
views in the exposure draft because they believe the
changes do not represent an improvement in some
respects. The dissenting board members expressed
concerns that the proposed approach is too complex,
there is no conceptual basis for some aspects of the
proposed guidance, and the benefits will not justify
the costs.
Planning ahead
Comments on the proposal are due to the FASB by
September 13, 2013, although the Board will likely
accept comment letters after that date. The Board is
also hosting a series of roundtable discussions that
will likely continue through early October.
The timing of the final standard will depend on the
feedback received. We do not expect to see a final
standard until 2014. Given the significance of the
changes, we expect the effective date will be no
earlier than 2017. But many companies are already
evaluating the potential impact and planning ahead
for the transition to new requirements.
For more information
If you have any specific questions, comments or
concerns, please share them with Hal Hunt of MHM’s
Professional Standards Group or your MHM service
professional. You can reach Hal at hhunt@cbiz.com
or 913.234.1012.