Leasing back on FASB's agenda; ED likely in '09.

Lease accounting was on the original agenda for FASB when the board was first launched in 1973. In 1976, FAS 13 was issued, and leasing remained a contentious issue through the '70s and beyond. Now, in 2006, it's back, and Financial Executive Executive Editor Ellen M. Heffes spoke recently with Leslie F. Seidman, a Financial Accounting Standards Board member, about why leasing is back on FASB's agenda--more than 30 years later--and what to expect.

The obvious question: why is leasing back on FASB's agenda?

Seidman: Part of our mission at FASB is to re-visit existing accounting standards when we get information that indicates that they are not producing decision-useful information. In recent years, investors and other users of financial statements have indicated to the board that the current lease accounting standards can produce information that's not decision-useful.

For example, the accounting for operating leases can omit significant assets and liabilities from the books of the lessee. This was specifically mentioned by the Securities and Exchange Commission (SEC) in their report on off-balance-sheet accounting, and it's also been present in the items that our advisory council (FASAC, or Financial Accounting Standards Advisory Council) has indicated as one of the top five priorities for the board to take on to its agenda when available resources existed.

There has also been an increasing call for simplification of accounting standards and, to the extent possible, a move toward principles-based accounting standards, and leasing is a very complicated area of the current accounting literature. First, you'd have a lot of numerical tests in the existing lease accounting model, and also there are numerous interpretations. So, it's somewhat unwieldy for practitioners to work with. Thus, in addition to an opportunity to improve the accounting model, we have an opportunity to simplify.

What are some of the main issues that make the lease accounting standards so challenging?

Seidman: First, there are a wide variety of arrangements currently. There are leases that apply to a photocopier, and there are leases that apply to an aircraft. So, depending on the nature of the item being leased, the terms of the arrangement, the tax implications of them, etc., you can be dealing with some pretty complicated arrangements.

The other thing that makes it challenging is that the existing accounting literature is very detailed. We have over 20 interpretations of the original standard (FAS 13), so when you're approaching a leasing topic, it can be difficult to identify all the relevant literature and then analyze it to make sure that you're getting a proper interpretation.

The area of lease accounting that people may not agree on is the existing approach in FAS 13 that is basically an all-or-nothing approach to analyzing who owns the underlying leased assets. [As it is] you go through a series of criteria to determine, on balance, whether the lessee owns the leased asset or the lessor. In recent years, in response to some of the criticism that current standards leave significant assets and liabilities off the balance sheet, some have suggested a different approach where you would look, for example, at the nature of the contractual arrangements, and to the extent that you have the right to use the assets, you would record something, as well as the obligation to pay for it. So, I think that'll be the crux of the discussion of any possible change in the accounting model.

FASB is working with the International Accounting Standards Board (IASB) to form the new standard, so they'll be consistent; is this part of the convergence project? What differences exist between international and U.S., and how do you expect to manage those differences?

Seidman: Actually, the existing standards for leasing are quite similar between the U.S. and IASB, but there are some differences. One example is the accounting for leveraged leases.

However, this is primarily an improvement project. In other words, we're viewing this as an opportunity to take a fresh look at the existing standards and try to provide more decision-useful information to investors. The focus is not primarily on convergence, because we're starting with fairly similar standards. So, I don't think it'll make it any more difficult; we're both going to face the same challenges.

What do you expect the new standard will comprise, and how will it differ from the current FAS 13?

Seidman: Let me first emphasize that we are at the very beginning of this project. We've just added it to the agenda with an objective of trying to improve and simplify existing leasing standards. So, I can't give any specifics about what types of approaches we might be analyzing.

But I can tell you that we do expect the project to address the accounting for lessors and lessees, and we will, most likely, be reconsidering whether the accounting model for leasing should be based on an analysis of who owns the underlying leased assets or some other approach; for example, accounting for the rights and obligations relating to the leasing contract. Beyond that, it's premature to go into any specifics.

Can you be a little more specific about what particular aspects of the current standard will be looked at?

Editor's note: FASB Project Manager for the leasing standard Danielle Zeyher responded to this question.

Zeyher: We're re-looking at the model. So, instead of the current FAS 13, where you either have an operating lease or a capital lease, we will be considering whether there is a different way to account for leases in general. We don't know what that new model will be at this point, but as Leslie [Seidman] was saying, we might take a look at what are the rights and obligations in a leased contract, and then we will also be considering whether those rights and obligations meet the definitions of assets and liabilities.

We'll also be looking at our conceptual framework project and trying to align this new lease standard with the current thinking. Both boards are doing a joint conceptual framework project, and so we'll want to make sure that anything we do is consistent with the current thinking on the conceptual framework.

Do you expect to bring in any other resources for this project, or does it go through the normal process at FASB? Do you expect, for example, to include preparers?

Seidman: We're in the process of establishing a working group of people with expertise in leasing. That'll include preparers, meaning preparers of financial statements or actual companies--both on the lessor side and the lessee side; and we're trying to make sure that we have different industry applications involved.

[ILLUSTRATION OMITTED]

For example, I mentioned equipment leasing. There's also, of course, real estate leasing and big-ticket items, like aircraft, and other things like that. In addition to the preparers, we'll make sure we have auditors involved, as well as users of financial statements, or investors.

The reason that we're setting up this working group is to make sure that we have good information about the nature of leasing arrangements and expertise about current applications of lease accounting standards. [That way,] when we're considering alternatives and issues, we have the input as early as possible in the process so that we're making good, informed decisions along the way.

This is more of a nuts-and-bolts group, and we're going to be going over common terms of lease arrangements, tax attributes, differences internationally, for example, so that we have a good handle on the scope of the transactions we're looking at. Then we'll have a good framework to use when we're analyzing how we would apply various approaches to this wide range of transactions.

Editor's note: Nominations for the working group were being accepted up until September 30.

Finally, the FASB press release noted that you aim to have a Preliminary Views document by 2008. Can you discuss a projected timetable?

Seidman: Our plan is to start the deliberations, and when I use that word, I mean involving the board. The staff is currently doing a lot of work, but we're going to start our deliberations in 2007, and the first public document that we plan to issue will be a Preliminary Views document some time in '08.

A Preliminary Views document is an early articulation of where the board thinks we might be heading on a project. We send it out for comment, we get comment letters on it, and we analyze those and consider whether we want to keep that direction or change.

The next step would be an Exposure Draft, most likely in '09. Again, it's pretty early for me to be commenting on that, but just to give your readers some idea of when they might expect to see an Exposure Draft on this: I don't expect it to be before '09.