Today’s agenda is made up of the following components:

1. Definition of a lease
2. Lessor accounting model
3. Lease term
4. 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.