Update 1: FASB 13 Lease Accounting Round Table
Today’s agenda is made up of the following components:
- Definition of a lease
- Lessor accounting model
- Lease term
- Variable lease payments
We are in the middle of Lessor Accounting. Here is a recap of Definition of a Lease:
- “The primary objective of the entire project is to accommodate for material assets and liabilities that are not on the balance sheet” – Leslie Seidman, FASB Acting Chairperson
- The boards are not sure how to handle service components that are bundled with asset leases. The airline industry gave the example of “dry” vs “wet” leases where a dry lease is only for the aircraft, and the wet lease includes crew and services. This is similar to a net vs gross lease in real estate.
- FASB and investors are concerned with “Financial Engineering” if service components are not capitalized. They fear that leases will start to look like service contracts.
- There is a discussion about materiality of leases. I.e. a full service real estate lease vs a copier lease. Many are concerned that it will be too difficult to distinguish.
- Toys R Us is concerned about the amount of work that needs to go into accounting for “non-core” leases like fork lifts, computers, copy machines, etc. Investors claim that the company cannot run the business without them, and that they are contractual obligations, therefore they should be capitalized.