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Unformatted text preview: Heads Up FASB Draws a Bright Line Through Operating Leases Proposed ASU Revamps Lease Accounting by Scott Cerutti, Jeff Nickell, and Beth Young, Deloitte & Touche LLP Lease accounting, the poster child for bright lines and rules-based accounting, is about to undergo a fundamental overhaul. On August 17, 2010, the FASB and IASB issued an exposure draft (ED), Leases . The ED, released by the FASB as a proposed Accounting Standards Update (ASU), creates a new accounting model for both lessees and lessors and eliminates the concept of operating leases. The proposed ASU, if finalized, would converge the FASB’s and IASB’s accounting for lease contracts in most significant areas. (The few remaining differences pertain mostly to discrepancies with other existing standards.) Essentially, all outstanding leases as of the date of initial application would be subject to the new lease accounting model — there would be no grandfathering of existing leases. In addition, the transition requirements would require adjustment of comparative periods. Comments on the proposed ASU are due by December 15, 2010, and the boards expect to issue a final standard in June 2011. Background The boards have been debating lease accounting since 2006, when they added it to their Memorandum of Understanding. Many believed that lease accounting relied too heavily on bright lines and that it offered entities the opportunity to structure arrangements to get a desired accounting effect. This often resulted in economically similar transactions being accounted for differently. In March 2009, the boards published a discussion paper that focused on the lessee’s accounting. However, the boards made the decision to also address lessor accounting in the ED. Effective Date The proposed ASU does not specify an effective date. The boards plan to consider the effective date after reviewing the comments they receive on the ED and after taking into account all other joint projects expected to be finalized in the coming year. In This Issue: •¡ Background •¡ Effective Date •¡ In a Nutshell •¡ Scope •¡ Lessee Accounting •¡ Lessor Accounting •¡ Presentation and Disclosures •¡ Transition August 17, 2010 Volume 17, Issue 27 The ED, released by the FASB as a proposed Accounting Standards Update, creates a new accounting model for both lessees and lessors and eliminates the concept of operating leases. 2 In a Nutshell The table below highlights the most significant provisions of the proposed lease accounting model. A more detailed discussion of various aspects of the model follows the table. Lessees •¡ Lessees¡will¡recognize¡a¡right-of-use¡asset¡and¡a¡liability¡for¡their¡obligation¡to¡make¡lease¡payments¡for¡all¡leases.¡“Off-balance-sheet”¡leases¡and¡the¡ concept¡of¡“lease¡classiFcation”¡in¡the¡current¡accounting¡model¡will¡no¡longer¡exist¡for¡lessees....
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- Spring '11
- Accounting, lease payments